With much fanfare, the Shenzhen Stock Exchange launched a small and medium-sized enterprise (SME) board on May 28. From its inception, the idea stirred controversy. Supporters believed that it would mark a fresh start for China's stock market.
The A-share market, established in the early 1990s, has been burdened by a history of unwelcome compromises. The SME board would offer new opportunities, with widely accepted rules becoming explicit regulations.
Given that the separation of share ownership has been a serious problem, proponents hoped that the new board would allow full flotation when firms are listed, so that trading would no longer be distorted by what was seen on the main board. But, the SME board does not allow full flotation. This has creating much disappointment. The decision can be explained in three ways. First, regulators were concerned that the volume of the new board would be so small that wealthy speculators could easily manipulate stock prices.
Second, after listing on the basis of creative accounting, an enterprise might sell for cash whatever stock of its own it holds.
Finally - and this is possibly the biggest worry - the new board might prove so attractive to investors that it would divert funds away from the main one.
To refute these excuses requires little argument. The main responsibility of the regulatory authority is to oversee and improve supervisory systems, while introducing market innovations. The regulators should not be bothered much by the movement of the market index. What is puzzling is why, after so many years of the development of the securities market, the government remains obsessed by the ups and downs of the stock market index. Is some vested interest working behind the scenes?