China's Growth Enterprise Board Has an Identity Crisis

By Guo Hongchao
Published: 2009-09-25

Economic Observer Website, September 22, 2009
Translated by Liu Peng
Original article:

Maybe it's because China's growth enterprise board (ChiNext) was ten long years in the making, but as soon as the new board started accepting applications to list, enterprises were scrambling over each other to take part.

Despite the rush of applications, it appears that the regulators were well prepared, as the new board's issuance examination committee was able to process 29 applications in just six days.

ChiNext (previously known as GEB) and also referred to as the second board, refers to the special new stock market being established to provide financing to small-and-medium-sized enterprises (SME) and start-ups that find it difficult to list on the main board.

Most companies that list on growth enterprise boards are small-scale, high-tech businesses, they're also usually, newly established companies that haven't displayed any kind of extraordinary performance in their formative year, but that have great growth potential.

In one word, the goal of establishing the new board is to offer a financing channel to high-tech firms.

Nearly a decade ago, also after 10 years of deliberations, Hong Kong unveiled its own growth enterprise market (GEM). The board's stated aim was to list newly-established SME, especially high-tech firms with high growth potential.

When considering the 13 enterprises that have already passed the scrutiny of China's stock market regulator, and are to be listed on the new board when it debuts in late October, we find that though they do have a history of outstanding performance - far exceeding the financial requirements prescribed by the CSRC - however, few of them meet the CSRC's requirement in terms of having "high growth potential and being "high-tech" companies.

In fact, of these firms that have been examined by the regulator, many are engaged in fringe or marginal services, equivalent to parasites that feed on the strength of traditional industry.

According to the prospectuses of the 7 firms that have been given the green light to list on ChiNext, 5 of them are either from or reliant on the manufacturing sector. 

If this is the case, we can hardly imagine that the new board can grow to be a hotbed for the support of China’s own future versions of Microsoft or Cisco System.

As for the firms that have already passed through the listing approval process, despite the fact that their capital tends to be smaller than other publicly-listed companies, why not let them list on the small-and-medium-sized enterprise board? Is there any big difference between these firms and those already listed on the main board?

Our small-and-medium-sized enterprise board has become a laughing stock, will ChiNext end up as the next punchline in China's long running stock market comedy show?

The fact that Beijing Ultrapower Software Company has moved from the small-and-medium-sized board to the new ChiNext market is an obvious example of how the difference between the two  boards is not very clear.

Furthermore, some firms that have applied to list on the new board have been in business for ten years and have already registered strong profitability. Therefore, they too should be qualified to list on the main board.

Only if the new board is limited to accepting high-tech firms that are in their infancy, can it exert its original function to help our country cultivate a new generation of high-tech firms.

I hope that China's stock market regulators don't let force "innovation" to make way for "stabilization," otherwise, the new board will become a bland concoction that is neither one thing or the other.

Links and Sources
Shenzhen Stock Exchange: ChiNext