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Introducing the New Beijing Stock Exchange

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Introducing the New Beijing Stock Exchange

China’s third stock exchange is geared toward financing start-ups, but it is unlikely to prevent overseas listings.  

Introducing the New Beijing Stock Exchange
Credit: Depositphotos

China’s new stock exchange based in Beijing will open on November 15. This exchange is aimed toward financing innovative start-ups, and will act as a third stock exchange in mainland China, in addition to the Shenzhen and Shanghai stock exchanges. However, the new exchange is unlikely to prevent Chinese firms from listing or cross-listing abroad.

The Beijing Stock Exchange will act as a new “Third Board,” listing companies in the areas of medicine, mechanical equipment, new materials, and information technology. The previous Third Board, the National Equities Exchange and Quotations (NEEQ), was founded in 2012, and was unsuccessful in raising sufficient capital for small and medium sized companies. The NEEQ was considered an entry-level, over-the-counter exchange for smaller firms to raise funds before listing on a stock exchange, either in mainland China or abroad. Listing regulations for the NEEQ are to be transferred to the Beijing Stock Change, as will the most profitable firms in the Select Tier.

In addition to these existing rules, the China Securities Regulatory Commission has published a series of regulatory documents that govern transactions, investment compliance management, stock listings, revisions, issuances for unspecified qualified investors and company restructuring processes, and exchange member management. Companies issuing prospectuses for IPOs will be required to submit higher quality information disclosures. Stock prices will not be permitted to rise or fall more than 30 percent within a single trading day. The exchange is also expected to issue rules on access by qualified foreign institutional investors and renminbi-qualified foreign institutional investors.

China’s innovative small and medium-sized enterprises (SMEs) have faced challenges in raising capital domestically. Banks are biased toward larger firms due to SMEs’ lack of collateral and other constraints, and therefore smaller firms have often chosen to raise funds abroad. The Beijing Stock Exchange seeks to provide an alternative for such firms to obtain capital at home. The location, at the seat of China’s national government, would increase potential supervision for these technology firms.

China already has similar exchanges, including the ChiNext board in Shenzhen and Star Market in Shanghai. ChiNext was initially beset with issues associated with a slow approval system, but both the ChiNext and the Star Market now maintain a U.S.-style, registration-based initial public offering system. The Star Market focuses on industries in the areas of new-generation information technology, high-end equipment, new materials, alternative energy generation, energy conservation, and environmental protection.

The Beijing Stock Exchange is unlikely to be successful in preventing Chinese firms from listing or cross-listing abroad. Cross-listing allows Chinese firms to overcome market segmentation by obtaining access to foreign capital, and doing so has allowed Chinese companies to compete internationally at the level of U.S. firms in terms of governance and transparency. Listing on U.S. exchanges also increases the status of Chinese firms.

China’s regulatory crackdown on technology companies in particular has imposed more stringent rules on some overseas-listed firms, notably on Alibaba and Didi. The crackdown was so intense that it led some pundits to claim that Chinese U.S. listings were too risky to invest in. CNBC’s Jim Cramer stated in July, “You’re a moron if you buy a Chinese deal after this.” However, even the new rules are unlikely to reduce the attractiveness of listing abroad for many Chinese firms. At present, some Chinese firms have looked toward listing in both Hong Kong and the United States to protect against potential delisting risks.

Notably, the new rules do not forbid overseas listings by Chinese tech companies. The Cyberspace Administration of China has stated that companies with data on at least 1 million people must undergo a cybersecurity review before engaging in an IPO abroad. In addition, officials have confirmed that Chinese firms will not be forbidden from listing overseas. China Securities Regulatory Commission (CSRC) Vice Chairman Fang Xinghai stated in July that Chinese companies will be permitted to list in the U.S. as long as they meet listing requirements.

Even if the pull toward listing abroad remains strong, this doesn’t mean that the new Beijing Stock Exchange will be unsuccessful in general. Chinese small enterprises have faced immense difficulty in raising funds due to a lack of collateral. This has been an issue since the outset of Reform and Opening, and authorities have attempted to combat the problem in different ways, from reforming financial institutions that cater to SMEs to requiring large bank to lend to them. SMEs that meet the listing requirements on the new Beijing Stock Exchange will be able to obtain funding in order to promote their innovative growth.