Mainland's second board is too important to fail

PUBLISHED : Saturday, 26 September, 2009, 12:00am
UPDATED : Saturday, 26 September, 2009, 12:00am

The mainland, which has the world's second-largest stock market, is about to launch its first growth enterprise market listing, but the rest of the world doesn't seem to be interested.

Why should it be? None of the world's experiments with Nasdaq-style growth enterprise markets has survived the test of time.

London's Alternative Investment Market was once a hot spot, but it has since been crushed by high listing costs, poor governance, issuer scandals and the increasing risk awareness of investors following the financial crisis. Market makers are dropping off and companies are filing for delisting.

Now we are talking about the mainland, which is notorious for its poor corporate governance, excessive government intervention and casino-like stock market. Why should people expect anything different, if not worse?

These are all fair comments, but if you believe the new board will be a flash in the pan and choose to ignore it, you will be very wrong.

There are all kinds of political and economic reasons why Beijing will make it work.

When I say political reasons, I am not talking about a loss of face should the second board fail. It is more important than that. Unlike its peers, which are each no more than another avenue to make or lose money, the mainland's growth enterprise market will play a critical role in the restructuring of the economy and maintaining social stability - and therefore the rule of the communist regime.

How? Much has been said about the long-term importance of an efficient and creative private sector in increasing productivity, upgrading technology and maintaining prosperity.

Medium-sized and small private enterprises account for 99 per cent of the country's companies. They churn out 60 per cent of the national income and pay half of the tax. More importantly, they create 75 per cent of the jobs.

To quote Minister of Industry and Information Technology Li Yizhong: 'No recovery in the medium and small enterprises, no recovery in the economy. No stability for them, no jobs for many and little stability for society.'

What he did not mention was the other side of the figures - the state-owned enterprises that account for 1 per cent of companies, produce 40 per cent of gross domestic product and create 25 per cent of jobs. While their contribution is relatively limited, the SOEs muster overwhelming political clout, consume a lion's share of the country's resources and enjoy a relatively protected market at the expense of the public.

In the eyes of the current leadership, the dominance of this interest group poses major threats to the 'harmonious society' and their effective rule and long-term survival.

Attempts have been made to clip the SOEs' wings - a dividend policy that takes money away from them; opening up of some industries; liberalisation of some fees; the rare tolerance of media criticism. If these efforts have in any way shifted the balance between the public and private sectors, it all evaporated with the financial crisis.

For the SOEs, the crisis is a feast. Financially, they have been hurt, but it's nothing fatal, given the government's unlimited support. Politically, with economic stability at stake, they have much more room in which to manoeuvre. As insiders, they have become the main, if not sole, beneficiary of the government's 4 trillion yuan (HK$4.54 trillion) stimulus package, enjoying new money, new power and protection of the domestic market.

For the private sector, it's a famine. The post-meltdown volatility and liquidity squeeze have expended the firms' financial energy. As outsiders, they have gained little from the stimulus and have not benefited from the flood of bank loans, while the domestic spending spree brings little comfort to their largely export-oriented business.

You can see a widening gap everywhere. In the property sector, premium land, with little exception, is grabbed by centrally owned developers at record prices. In the industrial sector, private entrepreneurs have had to sell businesses they have grown from scratch to state-owned rivals, either voluntarily, as in the case of China Mengniu Dairy, or involuntarily, like Shandong Rizhao Steel.

The result of this can only be increasing social discontent, if not hostility, towards the SOEs and the bureaucracy behind them.

It is in these political and economic contexts that Beijing decided to revitalise the medium-sized and small private enterprises. A top-down nationwide campaign was launched. Taxes were cut, fees waived, long-awaited rules for private equity funds announced and the growth enterprise market board - a channel for medium-sized and private enterprises to raise capital - approved after 10 years of study.

Sure, the mainland is full of rhetoric and white elephants, but in this case, far more important issues are at stake.

Just take a look at what people in the loop are saying and doing. Legend Holdings founder Liu Chuanzhi says the new second board is the next big thing of the direct investment business.

A month ago, its direct investment arm and United States-based private equity fund TPG invested a total of HK$1.6 billion in Wumart Stores, a mainland chain store listed on the Hong Kong Growth Enterprise Market - on condition that it would be listed at home within three years.

Yes, there will be investment mania and sky-high valuations; there will be dodgy companies and scandals; there will also be state intervention and manipulation; but the mainland second board is here to stay and prosper.