NewChina’s Third Board market a nursery and laboratory for start-ups, but investors beware

An over-the-counter market in China known as the Third Board is vitally needed to provide funds for cash-starved start-ups and is something Hong Kong should set up, but risks abound in a highly speculative market.

Its official title is The National Equities Exchange and Quotations, an over-the-counter platform that allows newly set up firms with ideas but no solid business track record to raise funds.

A trading platform for shares delisted from Shanghai and Shenzhen, the Chinese government relaunched the Third Board at the end of 2013. The reboot made it a market for startups, mainly IT companies, to raise funding. Only selected brokers and individual investors with over 5 million yuan can trade on the market.

Fund managers and investment bankers did not pay much attention to the Third Board until Chinese Premier Li Keqiang visited in December and showed his support to the market. The Third Board has since become more active.

As of May 28, there are 2,481 companies listed and many believe the total would hit 3,000 by the end of the year, higher than the stock exchanges of Shanghai and Shenzhen. But turnover on that day was only 530 million yuan, compared to the 2.4 trillion yuan turnover in Shanghai and Shenzhen on the same day.

In term of volatility, Third Board stocks are not capped by daily trading limits as they do in Shanghai or Shenzhen, where shares face a 10 per cent daily limit move. Wild price swings are the norm.