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Beijing Stock Exchange seen as elixir for capital market reform

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Cai Meng / China Daily

The establishment of the Beijing Stock Exchange will help to perfect the Chinese capital market system and improve its service function to the real economy, alongside the importance of the launch of the STAR market in Shanghai.

President Xi Jinping announced on September 2 that China would create a stock exchange in Beijing and make it a major base serving innovative small and medium enterprises, or SMEs.

This came after Xi announced in November 2018 that the country would launch the Science and Technology Innovation Council, or STAR Market, in Shanghai and pilot the registration-based system.

The establishment of the Beijing Stock Exchange will mark a major breakthrough in reforming the National Equities Exchange and Cotations (NEEQ) system, thereby strengthening the capacity of capital markets to support the real economy and fueling China’s economic transformation into growth. innovation-driven. fashion.

Since its inception in 2013, the NEEQ system, also known as the New Third Council, has served as the main platform of the capital market system to meet the financing needs of SMEs. The board provides a platform for SMEs not qualified to become listed companies on the Shanghai and Shenzhen stock exchanges to sell their shares.

Early in its development, however, the new third board encountered difficulties in fully fulfilling its funding and investing functions and suffered from lukewarm liquidity as well as voluntary exits of companies from the platform.

This difficult situation could be attributed to the variation in the quality of the companies traded on the board, some of which had poor fundamentals, as well as the strict standards of investors qualified to trade on the board which limited the scale of funds available for trading.

The market order has been gradually rebuilt on the new third board of directors as a series of reform measures have been taken since 2019, such as the relaxation of standards for qualified investors and the establishment of the NEEQ Select, the highest level of the board of directors.

As of September 2, 7,304 companies were listed on the new third board, with a total market capitalization of nearly 2,000 billion yuan ($ 309.8 billion). The 1,278 companies in the information technology sector accounted for about a third of the market capitalization, followed by the 1,170 industrial companies which represented more than a quarter of the market capitalization.

More than 1.7 million qualified investors have been registered on the system, which is 7.3 times the number observed at the end of 2019.

Despite some reform successes, there is still room for the new third council to better serve innovative SMEs.

During the period of the 14th Five-Year Plan (2021-25), China aims to turn around 10,000 SMEs into “giant small enterprises”. The term refers to leading SMEs that specialize in niche sectors, hold a high market share and have a strong capacity for innovation and core technologies.

There are now more than 4,700 “giant small enterprises” in China, the Ministry of Industry and Information Technology said.

Incomplete statistics show that nearly 800 companies traded or previously traded on the new third board are included in MIIT’s list of “small giant companies”.

The establishment of the Beijing Stock Exchange will mark a leap forward in the reform of the new third board, raising its status to the third national stock exchange equal to the exchanges established in Shanghai and Shenzhen.

A set of fundamental rules covering listing, trading, delisting, continuous supervision and investor qualification will be formulated for the stock exchange and all will meet the characteristics of innovative SMEs, strengthening the function of the capital market to support innovative SMEs and improve the efficiency of resource allocation.

Needless to say, promoting the development of innovative SMEs is essential for China’s high-quality economic development, as they greatly contribute to the country’s pursuit of boosting the manufacturing sector, removing bottlenecks in basic technologies and promote a mode of growth based on innovation.

From a different perspective, the Beijing Stock Exchange should also be a game-changer for the Chinese financial system, which is now dominated by the banking sector.

Widely used among developing economies in East Asia, such a structure has the advantage of efficiently channeling resources to the development of key industries and has enabled China to achieve great success in reform and reform. opening over more than four decades.

The strong banking sector has also enabled capital accumulation at a rapid pace, addressing the shortage of funds, which was once a major obstacle to the Chinese economy.

But in the future, capital markets are expected to play a greater role in empowering China’s innovation-driven economic development.

Several studies have shown that the development of the capital market will encourage innovation by high-tech companies and companies dependent on external financing. The way in which excessive dependence on bank loans is financed, on the contrary, will affect the innovative activities of these companies.

Innovation is a high-risk activity with the potential for high returns and asymmetric information. Asymmetric information occurs when one party to a transaction has more information than the other.

As a result, innovative companies in sectors like the internet, artificial intelligence and big data find it more difficult to access bank loans and other types of debt financing in the early stages of their development.

They rely on the capital market as their primary funding channel where defaults can be tolerated in the short term in the interest of substantial long term returns.

The establishment of the Beijing Stock Exchange will mark another milestone in the development of China’s multilevel capital market system, following the launch of the STAR market and the registration-based reform of ChiNext’s board of directors.

The new stock exchange will serve as a major base to facilitate the growth of “small giant companies” and complement the functioning of the Shanghai and Shenzhen stock exchanges, which mainly serve the financing needs of more mature and larger-scale companies.

All of this will help transform the Chinese financial system into a system more conducive to China’s economic upgrading that envisions an innovation-driven growth pattern.

Shao Yu is chief economist and Chen Dafei is a macroeconomics researcher at Orient Securities.

Opinions do not necessarily reflect those of China Daily.

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2/ http://global.chinadaily.com.cn/a/202109/13/WS613ea47ba310efa1bd66ef19.html

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