On May 18, the State Council approved Shenzhen Stock Exchange's plan to launch a secondary trading board for smaller, mostly private, companies. By May 28, eight of an estimated 1,000 companies in the queue had already been approved and listed, although trading in the shares has yet to begin.
At ceremonies welcoming the first arrivals, Standing Committee Vice-Chairman Cheng Siwei warned that the success of the secondary board – China's answer to NASDAQ and Hong Kong's GEM board – hinged on proper supervision and quality listings.
It will hinge on more than that. The secondary board was originally supposed to be launched in 2000. But Beijing cancelled the idea at the last minute, concerned that it could destabilize China's still-immature capital market system. One big fear was that investors would desert the Shanghai Stock Exchange with its old economy companies for the chance to invest in new and nifty high-tech firms on Shenzhen's second board, something that is still possible.
In fairness, the Chinese authorities at that point in 2000 had the example of NASDAQ staring them in the face. After passing the 5,000- point mark in early 2000, NASDAQ began its woeful descent to nearly 1,300 points as the dotcom revolution unraveled.
It is easily conceivable that in that post crash atmosphere the new Shenzhen market would have foundered too. But the immediate impact of the Shenzhen cancellation was shattering. Many of the 1,000 or more firms which had counted on raising money in the market to push ahead with development plans, collapsed. Others looked at prospects for listings offshore, or sought out private equity investors.
Now, Beijing faces different priorities. The energetic young SMEs are more politically acceptable and are clearly playing an important role in keeping unemployment rates down as the state sector shrinks. Equally important, Beijing wants to see the vast sums of money currently in savings accounts and under mattresses put to better use.
Chinese investors don't have many choices for investments, but the tens of millions of day-traders who were burned in the steep drops in the A-share market in 2000- 2001 may be willing to take a punt on small hi-tech companies in Shenzhen.
Secondary boards have not always delivered all they promised – Hong Kong's Global Enterprise Board (GEM) has a high proportion of Mainland companies listed on it, but trading levels on the exchange have always been very low.
Five years after launch, Hong Kong's second market has only 195 listings, and in the first five months of 2004, an average of only 2.2 million shares a day changed hands. That is set to fall further if the market's top four companies, including Phoenix TV and Tom.com, proceed with plans to shift up to Hong Kong's main board.
How many companies will be allowed to list on the Shenzhen second board? How will China's individual traders react? Will this provide the exit strategy foreign investors in local Chinese companies have been looking for? Will the market suck volume away from Shanghai?
Watch this space.
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