China's new 'third board' offers alternative financing to start-ups

Lower listing threshold of electronic equity transfer system proves attractive to more than 740 small firms in need of new funding sources

PUBLISHED : Saturday, 31 May, 2014, 12:59am
UPDATED : Saturday, 31 May, 2014, 12:59am

China's newly established electronic equity transfer system is likely to steal the limelight from the stock exchanges as the authorities loosen regulations on the over-the-counter market to offer millions of small businesses a financing alternative.

The National Equities and Exchange Quotations has attracted more than 740 start-ups since its official inauguration at the end of last year and the number is expected to surpass 1,000 in August.

The China Securities Regulatory Commission (CSRC) has given full play to market forces to foster the growth of the so-called third board, and the low listing threshold has ushered in a flood of small firms on to the market.

"The third board heightened our hopes for a better business environment," said Liu Jingdong, a chief technology officer with an online consultancy due to list on the market. "At least, it gave us a feeling that hard work would eventually pay off."

No profit or other financial requirements are needed for applications to the market. Companies just need to publish their audited earnings in the previous two years before listing on it.

CSRC vice-chairman Yao Gang told a forum recently that the increasing financing demands from the country's millions of small businesses amid a problematic banking system prompted the regulators to drastically develop a new fundraising platform for cash-hungry outfits.

About 2,500 companies are listed on the Shanghai and Shenzhen stock exchanges, compared to 14 million firms nationwide.

China's small businesses have been grappling with increasing labour costs, heavy taxes, dwindling external demand and serious funding problems since the global financial crisis in 2008.

Beijing had reiterated its determination to bolster troubled start-ups in recent years, but no concrete steps have been taken.

Small businesses are unable to secure banking loans as commercial lenders focus only on large state-owned companies.

The third board also targets the shadow banking system on the mainland through which trillions of yuan are funnelled with companies paying higher interest to access much-needed funds for expansion and operations.

Some analysts predict the number of listings on the new platform would reach 10,000 within two years due to the loosened regulations.

However, risk control remains a primary concern. On the stock market, fraudulent earnings involving dozens of listed firms were found in the past decade, sparking a crisis of confidence among investors.

Yao vowed zero tolerance for cheating in the market, adding that criminal acts would face severe punishment.

"We want to develop the market into a comprehensive and vigorous platform to offer financial services to various kind of companies," he told the forum.