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SCMP Reporter

Shenzhen's SME exchange launch comes as the city waits for Shanghai to steal its thunder, writes Mark O'Neill

When Shenzhen launched China's  potential Nasdaq-style second board last Thursday it should have been a day for celebration.

The city had lobbied for the new exchange for years with uncertain prospects for success. The board will help small and medium-sized enterprises (SMEs) raise funds, marking an important step in China's long march towards developing its capital markets.

Thursday's opening was a low-key event, with limited media access. Hosting officials  threw iced water on expectations.

'Building a board for SMEs requires a long-term and practical transition,' China Securities Regulatory Commission chairman Shang Fulin   said at the opening.

Enthusiasm for the new board is tempered  as the city will soon need to close the main Shenzhen Stock Exchange.  Authorities want to merge  the exchange with that of Shanghai, saying no country can have two  directly competing stock markets.  The second board was promised to Shenzhen as compensation.

The Shanghai city government is pushing for the merger before 2006. Shenzhen has resisted but the centre has tightened its grip and has banned  main-board issues in Shenzhen since 2000.

Listing criteria for the SME board will be the same as those for the main exchange.

Unlike the Nasdaq or Hong Kong's Growth Enterprise Market (GEM), second-board applicants  must show a profit for three years before they can list.

The decision to keep listing standards strict brought sighs of relief on the GEM, where there had been concerns that  an easy-access Shenzhen board would siphon off liquidity and attract the lion's share of  start-up listings.

'I do not see there would be any direct competition between Hong Kong and Shenzhen,' Hong Kong Exchanges and Clearing chief executive Paul Chow Man-yiu said.

With the merger of the main boards, Shenzhen will lose  its market  along with prestige and taxes.

'The merger  could come quickly, as early as next year,' Shenzhen University financial research centre director Guo Shiping said.   'The only hope for Shenzhen is to do a good job of this SME board and a Nasdaq-style board in future. If not, the whole market will be merged with Shanghai and it will merely become a part of the Shanghai market.'

Beijing Standard Consultancy president Liu Jipeng  said China would have a three-legged capital market - Hong Kong for blue-chip companies that want to attract foreign money, Shanghai the main board for big companies and Shenzhen a secondary market for SMEs.

There are compelling arguments for  the merger. At present, Shanghai and Shenzhen have competing indices that make it difficult for pensions, trusts and other institutional investors to set a benchmark to measure China risk.

With  rival markets each protected by their local governments, regulators have also found it hard to monitor them successfully. Insider trading, accounting irregularities and lack of investor confidence have turned them into the poorest performing in the region despite a booming national economy.

The establishment of a stock market in Shenzhen in 1990 was a historical oddity. The government was so nervous  that it chose to put it in a special zone far from the main commercial district. The exchange in Shanghai, by contrast, is located on the site of the pre-communist exchange, in Pudong.

Nonetheless, the opening of the new board in Shenzhen represents an important step, since it should help the sector of the economy that is the most dynamic and has been worst served by the capital markets until now - private companies.

'It will give SMEs and start-ups that have grown rapidly, especially private companies, more opportunities and should have great significance for Shenzhen and the Pearl River Delta and its integration with the Hong Kong and Macau economies,' said  Dong Furen, deputy director of the economic committee under the Chinese People's Political Consultative Conference.

Initially, the board will comprise 30 to 50 small-cap firms that have already received approval from the CSRC. Listing requirements will be lowered gradually, with the final step the establishment of a separate, independent board for a Nasdaq-style market. This is likely to take three to five years.

'We initially hoped to list on the Shanghai main board but since we are relatively small, the CSRC decided to put us on the second board in Shenzhen,' said an official from Jiangsu Qionghua Hi Tech, one of the two debut firms.  'The flotation will help us raise money to expand our operations.'

Cynics  say small capitalisations will make second-board stocks easy to manipulate. Proximity to Hong Kong will lure in hot money  eager to bet on yuan appreciation.

Additional reporting by Enoch Yiu



Second board quietly eases into action