Millions of China's small firms are short of funds, a handicap that is difficult to reconcile with the situation on the ChiNext market, where firms traded on the Nasdaq-style second board are awash with idle funds raised from investors.
The 149 companies that floated initial public offering shares on the technology-laden start-up board in the past 12 months have so far used less than one-fourth of the proceeds to fund their growth, according to the official China Securities Journal.
The finding has unleashed a flurry of questions over the functioning of the IPO market, which was created to spur the development of China's innovative start-ups.
The companies raised a total of 60.3 billion yuan (HK$72.8 billion) through share offerings, persuading investors of their huge growth potential through the planned expansions outlined in their prospectuses.
However, many have failed to live up to the promises of carrying out the promising and high-tech projects they outlined, investing only 13.6 billion yuan, the report said. Most of the funds now lie idle in bank deposits, triggering worries among investors that that they will be misused to speculate on equity or property markets.
The failure by many budding businesses to put their IPO proceeds to productive use has become a severe image problem for the ChiNext market, as the founders or top managers of the startups, following their successful IPOs, appear to have lost their entrepreneurial drive because many have become billionaires overnight.
Beijing launched ChiNext in October 2009 after more than a decade of preparations, hoping the second board could help thousands of prospective small companies raise much-needed capital to fund their growth. The Shenzhen Stock Exchange required ChiNext-listed firms to properly utilise their IPO proceeds within six months, a move to safeguard investors' interests.
Mainland investors flocked to what they saw as future cash cows when the market made its debut, amid the widespread belief that most of the start-ups could generate hefty earnings growth, or at least 50 per cent annual profit jumps in the coming years.
'It has become an obvious trend that an increasing number of the listed firms are taking a go-slow approach in conducting technology innovations after tapping the market potential,' said Ray Lu, a manager at Hotung Ventures. 'A primary concern is that the founders might have felt successful after the IPOs, and are now failing to take further steps to develop their companies.'
Shenzhen Sunway Communication, a maker of mobile terminal antennas, raised about 500 million yuan in an IPO on November 5. Though it planned to invest 190 million yuan to expand a production line, Sunway so far ploughed a scant 94,000 yuan into the project.
What is worse, after nearly two years, the first batch of 28 firms listed on ChiNext have so far invested only 52.2 per cent of their IPO proceeds into their planned expansions. As the companies have parked a large proportion of the funds in banking deposits earning interest rates of just 3.5 per cent, their predicted high earnings growth has failed to materialise.
As the ChiNext-listed firms were questioned about their use of the capital that they raised, millions of China's privately owned small businesses grapple with a serious financing problem due to the government's monetary tightening.
The All-China Federation of Industry and Commerce, the official chamber of commerce for non state-owned companies, said the predicament of small firms was even worse than the credit crunch they suffered during the global financial crisis three years ago.