After close to 10 years of preparation and the recent approval of listing rules by the China Securities Regulatory Commission, the Shenzhen Stock Exchange's highly anticipated Growth Enterprise Bourse -- dubbed China's Nasdaq -- is said to be ready to launch at a date near China's National Day on October 1.
Song Liping, general manager of the Shenzhen Stock Exchange, says with the launch of new bourse, much needed capital will be injected into China's small- and medium-size companies and developments in the nation's nascent venture capital and private equity industries will be accelerated.
The development of venture capital financing has been stuck in a bottleneck, says Song.
Most VC funds tend to prefer mature and late-stage investments. They also exhibit a bias against funding younger companies, which starves these firms of much needed capital for ongoing development.
In 2008, venture capital investments totalled only $4.2 billion in China, which translates to only 0.1% of the country's GDP, compared to about 1% in developed markets. In particular, Song notes that between 2003 and 2008, only about 20% of all VC investments, or $2.3 billion, had been dedicated towards seeding new companies.
Since the financial crisis, the central government has been working with provincial governments, commercial banks and venture capital funds to expand the availability of liquidity and capital for industry.
With the launch of the new bourse, Song notes a new channel will be added to provide funding for higher growth, higher return and riskier enterprises in the market. It will also help to transform the structural diversity of China's investor base.
Song says she is keen to see a new generation of angel investors, VC feeder funds, professional VC institutions, private equity firms come to the market in China, connecting the missing links between China's financial markets and real economic activities.
She warns, however, that the arrival of the new bourse will give investors exposure to a range of industries in China's new economy that previously have not been accessible. Investors will need to become familiar with their business models and learn how to accurately value the assets.
Even with 19 years of capital markets development and 1,500 listings to date, the risks around pricing for newer companies is still a weak point in China, Song says.
It is hoped the new bourse will bring about a market that will efficiently allocate capital and provide a better environment for China's young businesses to grow.
This will happen with three qualifications:
China needs to further its regulatory mechanism for listings. Having considered the nature of growth enterprises, the CSRC has stressed disclosure requirements and accountability for the exchange, issuer and underwriter in risk warnings.
Securities brokerages need to step up in their role as intermediaries, delivering better research, enhancing their functions in risk evaluation and risk pricing, as well as facilitating the market in its function of price discovery.
But most important, Song notes, is the need for China's investors to be sensible. In designing its trading rules, the Shenzhen Stock Exchange has stressed the level of investor experience. She points to the follies American investors went through in the heated days during the tech bubble on Nasdaq. She says China is at risk of going through some of the same tremors that American investors faced as the growth bourse develops.