Shenzhen challenges Shanghai
By Chen Yao (China Business Weekly)
Updated: 2004-06-03 09:01

The Cantonese pronunciation for May 18 -- which sounds similar to "I want to be rich" -- broadly expresses one's aspiration for financial fortune.

It could be coincidence, but May 18 marked a milestone for Shenzhen -- as the bustling, affluent city, adjacent to Hong Kong and in South China's Guangdong Province, secured its position as one of the country's financial hubs.

The State Council, or the nation's Cabinet, on that day approved the city's long-shelved plans for a specialized trading board for China's high-tech and start-up companies.

The city cheered, especially the hundreds of securities houses, which have, for the past four years, been drained of funds.

Many of those firms had begun considering relocating their regional headquarters to Shanghai, the city's arch-rival to the north.

Industry analysts estimate nearly 100 billion yuan (US$12 billion) worth of investment funds have left the city in the past four years. A large proportion of those funds went to Shanghai.

Financial professionals have also left Shenzhen, which added uncertainty to the city's future.

Not only has the State Council's approval ended fears that the once capital-raising dreamland was slipping into oblivion, but it also allowed the local government to reawaken the city's aspirations.

Those dreams have long been vividly depicted by Shenzhen's statue -- a running bull.

The Shenzhen second board will soon proceed with firms' listing applications, although no specific date has been set.

Shenzhen's stock exchange first proposed the second board in 2000. But fears the new bourse would be doomed to fall, along with US-based NASDAQ and other high-tech boards worldwide, prompted policy-makers to suspend the plan.

The NASDAQ, after roaring to 5,000 points in early 2000, tumbled to nearly 1,300 points when the dotcom bubble burst. This cast a shadow over Shenzhen's proposal, in which the new trading board would resemble the NASDAQ.

Establishment of the new bourse was finally shelved in 2001. Although local government officials lobbied hard for the plan, the country's financial authorities remained silent.

Policy-makers' primary concern, however, was the implementation of inappropriate regulations would damage the second board's reputation, which would affect China's main boards.

The bourse had originally drafted listing rules that set lower thresholds for small- and medium-sized enterprises' (SMEs) capital levels. Those rules did not require the firms to provide consistent profit-making records during the three years prior to listing.

Policy-makers rejected those rules. They said, when they announced the board's approval, all applicants must adhere to the main boards' entry standards of 50 million yuan (US$6 million).

It is unclear if companies that list on the second board will be allowed 20-per-cent price swings, rather than the 10-per-cent daily trading limit that currently applies in China.

The current limit was adopted four years ago.

The financial authorities, to guarantee the quality of listed companies, have stipulated stricter information disclosure and a more comprehensive warning system for irregular trading.

They have made it clear firms that violate trading rules will be punished severely -- or delisted.

The securities authorities' past failure to delist market cheaters has given many people reason to doubt they will do so with high-tech and start-up companies.

The launch of the new bourse will, nevertheless, benefit China's 8 million SMEs, which have long been forced to cope without adequate funding channels.

China's main boards, which began operations in the early 1990s to raise funds for the State sector, have shut SMEs out due to murky listing procedures and the authorities' preferential policies towards loss-making State-owned enterprises.

China's SMEs represent the fastest-growing segment of the economy. They also create 75 per cent of the jobs in urban areas.

Chinese banks rarely provide loans to cash-strapped SMEs, because most of the firms cannot provide credit records. Also, bankers still believe lending to the private sector is risky business.

Launching the board especially for SMEs will, as argued by experts, enrich China's capital markets and will cultivate the dynamic private sector.

The SME board will have the same listing standards -- and basic rules and regulations -- as the main boards.

But the SME board will have more rigorous monitoring measures. In addition to the disclosure of the trading parties of stocks that rise or fall more than 7 per cent on the existing Shanghai and Shenzhen stock exchanges, information regarding abnormal fluctuations, such as the fluctuation range and turnover rates, must be reported.

Some problems inherent in the main boards will likely be part of the new bourse. For example, shares will also be classified into tradable and non-tradable shares, with different prices.

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