In a move that could pull down standards at the Shanghai and Shenzhen stock exchanges, the government has indicated that a new growth market could soon be introduced at Shenzhen.
At the end of March, the China Securities Regulatory Commission set out plans to regulate its Growth Enterprise Market. These are set to come into effect on May 1, suggesting the market itself may be established soon.
“China knows it needs to improve the quality of the main board of the Shanghai and Shenzhen stock exchanges and the companies listed on them,” said Edward Sun, a Beijing partner at Milbank Tweed Hadley & McCloy. “One concern is that a secondary board with lesser standards might be counterproductive to meeting this goal of improving the quality level of domestically-listed companies.”
The Growth Enterprise Market has been discussed for a while; IFLR reported on it in April 2008 but the government has since been quiet on a date for its implementation. Then last month the government published rules to govern applications for initial public offerings on the board.
A company wishing to list must ensure that “its aggregate net profit in the most recent two years is no less than Rmb10 million” ($1.47 million) and that its income continues to grow by 30% or more per year. The company must also have net assets of Rmb20 million or more.
IPO applications will be overseen by a reviewing panel, comprising 35 officials. The main board is monitored in a similar fashion, but the new board will have 10 more monitors in recognition of the complexity of some of the businesses coming to market. Hi-tech companies, for example, are likely candidates.
The regulator also set out rules to govern underwriter conduct in potential IPOs. Underwriters must agree to monitor the corporate governance and use of funds for three years. Again, this follows the main board model that requires underwriters to do this for two years.
The secondary exchange looks set to be popular; 700 companies are reportedly keen to list once the market opens, including Chinese companies that hoped to list in Hong Kong and are now restructuring to list on the domestic market.
However, the government has frozen domestic IPO activity in an attempt to protect the shares of existing listed companies from competition. Sources predict this will ease once the Shanghai Stock Exchange passes a certain point, but its fate could affect the date the secondary exchange at Shenzhen becomes reality.
The Shenzhen Stock Exchange has yet to publish its own technical guidelines, leading some lawyers to question when the secondary board will be established.
“There have been so many false starts since the secondary board was conceived in 1998,” said Sun, “that when I first heard the news my reaction was “I’ll believe it when I see it”. But this time the Interim Measures adopted seem to set forth a formal structure for the secondary board to be set up by August of this year, so keep your fingers crossed.”