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SCMP Reporter

Shenzhen exchange may struggle as promising firms shun mainland markets

By favouring Shenzhen with its first new listings in a year, China will  try to succeed where most major capital markets have failed.

Shenzhen's nascent secondary exchange for small and medium-sized enterprises (SME) has been tipped by Beijing regulators to host four of the six firms shortlisted to sell shares on the stock market following a year-long hiatus.

CAMC Engineering was first out of the gate last week with a stellar, if short, run. The firm's shares rose fourfold on their debut last Monday but have fallen 10 per cent, the maximum allowed, on each subsequent day. Two more companies' shares begin trading this week.

Still, the long-term concern is that Shenzhen is not ready for the challenge.

The idea of a more vibrant junior exchange has played out with mixed results in major markets such as  London,  Frankfurt and Tokyo. Similarly unimpressive have been regional efforts such as the Philippines SME board, Bursa Malaysia's junior exchange and Hong Kong's own 'buyer beware' bourse, the Growth Enterprise Market (GEM).

Shenzhen's SME board had a trading turnover during the past six months that was roughly  10 per cent of Shanghai's, which in turn was  50 per cent of Hong Kong's.

Including the CAMC listing, the city's SME index features only 51 companies. By comparison, London's AIM is home to 1,500 firms and Nasdaq in the US hosts 3,300. Even  the GEM board, home to a total of 200 companies, boasts 48 H-shares and red chips.

'Shenzhen has been increasingly marginalised,' said a source  recently briefed by mainland stock exchange officials. 'Right now, Hong Kong is the only international financial centre recognised by the senior leadership in Beijing.'

Shenzhen's second board was originally conceived as a Chinese version of Nasdaq during the  dotcom boom. Share sales were suspended in late 2000 in anticipation of the launch  that was scrapped after the global technology bust in 2001. Listings did not resume until 2004 when it was finally introduced as an SME bourse, only to have share sales stopped again last year.

'I don't think anyone really knows what the future of Shenzhen will be,' said Stephen Green,  an economist  at Standard Chartered and author of two books on mainland stock markets.

'The ambition was to set up the second SME board because the idea of having a hi-tech board kind of fell apart,' he said. 'That hasn't worked out half as well as one was expecting given the poor state of some of the companies that managed to get listed in Shenzhen.'

The flipside of this  is that homegrown firms with arguably better prospects tend to bypass mainland markets altogether - and not just  blockbuster listings such as  Baidu.

Beijing-based Biosino, for example, raised  $66 million in  its February  initial public offering on Hong Kong's  GEM board.

A start-up biotech firm under the Chinese Academy of Sciences, the company has about 18 per cent of the domestic market for the niche biopharmaceuticals it manufactures, according to investor relations representative Xu Cunmao.

Management considered a listing in Shenzhen two years ago when the company started weighing its  initial public offering but opted instead to look overseas. 'Domestic markets change too much. They take listings for a while and then stop,' Mr Xu said. 'Under these circumstances it is impossible to list domestically.'

For Shenzhen to stand alone  as a truly independent secondary market, regulators first have to sort out larger issues with the main boards.  Now, A shares listed in Shanghai and Shenzhen are  trading in the same market.

The big boards in Shanghai and Shenzhen are subject to the same listing rules and run by the same body. The China Securities Regulatory Commission has essentially owned and operated both exchanges since it took over their management  in 1998.

Shenzhen-listed A shares probably would have to be transferred to Shanghai before the SME board - essentially a sub-index now - could operate as a full-fledged junior exchange. The  catch-22 is that to preserve both Shenzhen's ambitions as a financial centre and a source of tax revenue, such a move probably  would  have to wait until the SME board grows big enough to stand on its own.

'One of the challenges for any major market is to have a junior exchange,' said Jamie Paton, Asia-Pacific managing director at venture capital firm 3i. Foreign investors usually exit mainland investments via offshore listings,  largely because of currency convertibility issues but also because there is little or no recourse to domestic listing for the upstarts that often receive backing from non-institutional investors.

'I think that's all beginning to change,' said Mr Paton. 'Private equity is investing in A shares now. The opportunities to invest in mainland stock markets are in a state of transition at the moment.'

Brandon Lin, a partner at investment firm Saif Partners, said that in the long run, domestic listings were  likely to become more attractive. 'Traditionally, home stories perform best on the home market, assuming you can get the home market to be rational.'

Shenzhen is a long way from being as rational as, say, the Nasdaq. Meanwhile, regulators are  occupied with the reform of the mainland's US$200 billion-plus in non-tradeable shares. But as the private sector continues growing the demand for more capital is certain.

'If you get the regulatory framework right, there  will be huge demand, particularly for Shenzhen's second board,' said Mr Green.

With additional reporting by Cameron Dueck



Beijing bets SME board will draw mainland bulls