With new bourse, China's capital market strides forward in supporting innovation

In a key step forward, China has decided to set up a new stock exchange in Beijing, building it into a primary platform serving innovation-oriented small and medium-sized enterprises (SMEs) as the capital market evolves to meet the financing needs of various entities.

Differentiated from the stock exchanges of Shanghai and Shenzhen, the new Beijing bourse has the clear mission of serving innovative SMEs, as China's economic resilience hinges heavily on the well-being of the country's myriad businesses.

The creation of a third bourse aims to shore up the weak link in China's capital market, build a complementary development path for SME financing, and foster a healthy market environment for innovation and entrepreneurship, according to the country's top securities regulator.

Weak link

Since the reform and opening-up, China's SMEs, on the back of the country's vast market and economic rise, have played a major role in spurring innovation and quickly grown into major job creators and drivers of growth.

But in recent years the sector has faced increasing pressure from economic headwinds, higher costs of labor and materials, as well as financing difficulties due to a lack of support from banks and financial institutions.

According to a report by the World Bank in 2018, China's SMEs and micro firms had a finance gap of 1.89 trillion US dollars, accounting for 17 percent of the country's GDP.

Besides encouraging banks to lend more to the SMEs, Chinese policymakers have been taking steps to reform the capital market to enable direct financing of the firms to fix the structural imbalance.

In 2013, a national equity exchange system known as the "New Third Board" was launched to facilitate financing for China's non-listed firms, allowing them to exchange equity and raise funds on the platform.

Positioned as an important venue for the capital market to serve SMEs and private businesses since its debut, the New Third Board has offered financial services to 13,000 companies.

But problems have emerged, such as insufficient liquidity and dwindling listings, as the financing and trading rules in the system can no longer meet the needs of firms, prompting authorities to make further reforms.

Last year, China introduced new rules allowing eligible companies listed on the New Third Board to shift to the sci-tech innovation board of the Shanghai Stock Exchange and the Shenzhen Stock Exchange's board of growth enterprises, so as to strengthen the connection between multi-level capital markets.

New start

The creation of the Beijing stock exchange is part of efforts to deepen reforms of the New Third Board, marking a major institutional breakthrough and a new start in China's capital market.

Built upon the New Third Board, the Beijing bourse will host selected companies traded on the equity exchange platform and pilot the registration-based IPO system.

The stock exchange will not impose a limit on the price change on the first day of trading, and daily trading movements will be restricted within 30 percent after that.

The move offers an important venue for SME financing, lowers the threshold for growth companies to obtain financing through formal institutions, and will help foster a multi-level capital market, said Zou Yasheng, head of the School of Banking and Finance with the University of International Business and Economics.

Stressing the significance of the Beijing stock exchange, Sui Zhenjiang, vice mayor of Beijing, pledged that the city would solidly implement related policies to facilitate the setting up of the bourse.

As the national center of science and technology innovation, Beijing has rich resources in the field and has achieved remarkable results in applying related technologies.

In the future, the city will provide equity trading conditions for multinational companies investing in technology-based SMEs to promote win-win cooperation, Sui said.

Mattias Debroyer, economic and commercial consul with the Brussels Agency for Business Support, hailed the move to shore up support for innovative SMEs and called on more synergies between Beijing and Brussels.

"Beijing and Brussels have been partners for more than 25 years," he said, adding that he hopes the two cities will "have more cooperation in the field of stock exchange."