China takes a step closer to unveiling a new stock market inspired by Nasdaq

The technology innovation board at the Shanghai Stock Exchange, the latest effort by Beijing to create a Chinese version of Nasdaq, is expected to debut in the middle of 2019 with unprofitable companies likely to be allowed to raise funds.

But only those companies who have core technologies such as computing, software design and pharmaceutical drug development will be welcome to the high-profile board as China scouts for future profit stars to sustain its economic growth.

According to two asset managers who were briefed on the preparations for the new market, the Shanghai exchange is likely to begin reviewing initial public offerings (IPOs) by applicants in as early as March next year, while letting the first batch of prospective technology firms list on the board in June.

The Shanghai bourse is accelerating its pace of drafting rules for the new board and plans to publish them in January.

The plan to create the new board was announced by Chinese President Xi Jinping in early November, as part of the efforts to bolster Shanghai’s role as an international financial centre.

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Sources said that regulators were considering drastic liberalisations to build a real Nasdaq-style market on the mainland, which includes scrapping of profit requirements, adopting a registration based IPO mechanism, loosening foreign-exchange controls and using a flexible trading system.

To date, unprofitable companies are still barred from raising funds on the mainland’s two main stock markets.

Domestic technology companies will be given a priority when the bourse selects the first batch of listing candidates.

Companies with unproven technologies such as blockchain and online platforms such as bike-sharing services will not be eligible.

“It will be a different market than the ChiNext in Shenzhen,” said Ivan Li, a fund manager with Loyal Wealth Management. “The technology innovation board in Shanghai is certainly aiming to have China’s equivalents to Microsoft and Apple.”

The ChiNext market, established at the Shenzhen Stock Exchange in 2009, is a start-up board that accepts only small-size technology firms.

Beijing attempted to create a technology board for emerging industries in 2016, but shelved the plan later due to concerns of a huge liquidity drain.

It will also be the first time that the mainland embarks on a registration-based IPO system to facilitate companies’ fundraising.

Under the new mechanism, companies are required to fully disclose information about their earnings and operations once they file IPO applications.

The regulators will review the documents to ensure their truthfulness before giving the companies the go-ahead for listing.

At present, the China Securities Regulatory Commission has decision-making control over IPOs. The commission reviews an applicants’ performance in the past years and assesses their earnings potential while having a say in the pricing of the shares.

Foreign-funded Chinese technology companies will also be allowed to float new shares on the board.

Beijing planned to use the Chinese depositary receipts (CDR) system to lure back some overseas-listed mainland technology companies to re-list on the local market in the first half of this year.

But it delayed the implementation of the system to avoid an equity influx that could exacerbate the weak market.

Under the CDR system, part of a company’s shares are transferred to a custodian bank, which sells them on an exchange abroad.

The launch of the technology innovation board is likely to see a first CDR issuance on the Shanghai exchange.