OTC ambition stirs disquiet
The Beijing city government's ambition to launch a new equities exchange has won its former mayor's blessing, but it surprised mainland stock market investors who are already concerned about tight market liquidity.
Some analysts see the plan backed by Vice-Premier Wang Qishan to set up a new over-the-counter (OTC) equities market in the city as the latest volley by Beijing to keep its leading role as the nation's financial centre against fierce rivalry from Shanghai.
Wang, 64, was Beijing's mayor from 2003 to 2007 and was a key player in Beijing's staging of the 2008 Olympic Games.
Shortly before the Games began, he was promoted to be one of the nation's four vice-premiers, responsible for economic and financial issues.
The new OTC plan theoretically could help some domestic small- and medium-sized enterprises (SMEs) obtain funding, but that effect will be limited because of the likely small market capitalisation of the new nationwide board as well as the potentially mixed response from investors, analysts say.
Wang, a former banker, was quoted by state media earlier this week as saying that the new OTC market is 'an important part of building up a multi-layer capital market' on the mainland.
He also noted the new market could give SMEs another source of financing. SMEs, which contribute more than 60 per cent of the national economic output annually, often find it difficult to get loans from banks.
Currently, there are two national bourses on the mainland - the Shanghai Stock Exchange and a smaller one in the southern boom town of Shenzhen on Hong Kong's border.
Unlike the two stock exchanges, the new OTC market is aimed at institutional investors, particularly major domestic funds, rather than individuals. If the new board is given the go-ahead, it will mainly focus on high-technology companies.
Beijing has been locked in a financial race against Shanghai. Some of Beijing's advantages are obvious - including the fact that it is the home of the nation's central bank, as are all three regulators of the banking, securities and insurance industries. Shanghai, though, is generally regarded as the nation's commercial hub and many foreign bankers choose it as a base.
'I think the impact that the OTC board could have on SME financing is limited, but it will be a boost for Beijing to maintain its financial centre position in China,' said Liu Ligang, chief economist for Greater China at Australian bank ANZ.
'The real challenge is not whether we need such a market, but who is going to invest in these companies,' said Hu Yifan, chief economist at Haitong Securities International.
She notes that in each of the past two to three years, between 200 and 300 companies have launched initial public offerings on the mainland.
Last year, the benchmark Shanghai index was one of the world's worst performers, partly because of tight liquidity and an excessive supply of shares.
Wang is expected to join the mainland's nine-member Politburo Standing Committee this autumn, and perhaps be promoted to a more important government position next year during the power transfer from President Hu Jintao to his successor, most likely Vice-President Xi Jinping.
Wang is no stranger to the financial industry. During his days as Beijing's mayor, he helped the city attract several foreign banks, including JPMorgan and Societe Generale, to set up their China headquarters in Beijing. Wang even personally wrote letters to chief executives of foreign banks in China to strongly lobby them to remain in Beijing rather than to relocate their headquarters to Shanghai, according to a chief executive of a foreign bank whom Wang lobbied to stay in Beijing.
Wang and his allies originally floated the idea of an OTC market for SMEs in 2006. It won the backing of the State Council, the nation's cabinet, for a trial run the same year. The new board was located at Beijing's Zhongguancun Science and Technology Zone. But trading was thin, particularly after the global financial crisis of 2008 and 2009. On Tuesday, Xinhua ran an article about Wang visiting Zhongguancun and calling for quick steps to formally create a national OTC market.
The news shocked investors on Wednesday and sent the Shanghai benchmark index below the psychologically important level of 2,300 points. The benchmark Shanghai index lost 1.43 per cent to close at 2,252.16 points yesterday, while the composite index of Shenzhen, where most small-cap stocks are traded, also fell 1.19 per cent, closing at 9,418.23 points.
'If the main board is unstable and keeps falling, how can you create a new market to provide more share offers?' said a securities analyst in Hong Kong, who cites Wang's comments as a key reason for the markets' decline.
Shenyin Wanguo Securities forecast in a report issued yesterday that the new OTC market could be launched as soon as the third quarter of this year.
But ANZ's Liu does not expect the new board to be launched any time soon. 'The reason why SMEs have difficulty getting loans is that their accounting is more opaque, requiring more time and effort from the banks or markets to figure them out,' Liu said, noting that the OTC operators may find it even more difficult than banks to verify financial information from SMEs.
Mainland firms need to have two straight years of at least this amount of profits, in yuan, to apply to list on the ChiNext board in Shenzhen