A new investment system – Guangdong Focus

In January 2013, the China Securities Regulatory Commission (CSRC) decided to accelerate the development of the multi-level capital markets in which means of fund-raising complement each other to satisfy the financing demands of various sizes and types of enterprises. The CSRC aims to gradually reform the national capital market system to a four-level pyramid ecosystem, which include the main board (including the SME board), the growth enterprise board, the NEEQ (national level over-the-counter market) and the REEM (regional over-the-counter market). Each level of the capital market system will provide different listing criteria for different types of enterprises, such as financial indicators, information disclosure and modes of transaction and supervision, to preliminarily realise a new structure involving diversified entities, multiple sources of funds, various methods of investment and the marketisation of project construction. More importantly, a healthy multi-level capital market will refine the economic structure, raise investment returns and promote coordinated development and overall social advancement.



On December 14 2013, the State Council released the Opinions on Issues Relating to the National Equities Exchange and Quotations. The CSRC then issued the Measures for the Supervision and Administration of Unlisted Public Companies and seven other related rules. As a result, the NEEQ, which implements a promoter brokerage system, had been established in December 2013. Any Chinese joint-stock enterprise, which has continuously operated in compliance with the regulations for more than two years, can be listed in the NEEQ upon the recommendation of promoter brokerages. Companies whose shares are quoted in the NEEQ are non-listed public companies and the number of shareholders may exceed 200. In addition, the NEEQ will implement a system for managing the appropriateness of investors. Investors participating in share transfers should possess experience in securities investment, risk identification and bearing capacity. By mid-August 2014, more than 1,000 joint-stock companies have been listed in the NEEQ. The number of listed companies in the NEEQ is expected to exceed the total number of that in main board and growth enterprise board in the next year.

The rise of Guangdong

Guangdong province is on the South China Sea coast of China. Since 1989, Guangdong has topped the total GDP rankings among all provincial-level divisions. It is home to the production facilities and offices of a wide-ranging set of multinational and Chinese corporations and also hosts the largest Import and Export Fair in China called the Canton Fair in Guangzhou, the capital city of Guangdong province. With the support of a good economic environment, Guangdong has recently focused on developing the financial industry and expanding the levels of the capital markets. According to the Opinions on Issues Relating to the reform of Financial Industry and Improve the Financial Market System released by the General Offices of the Guangdong People's Government in June 2014, Guangdong will closely connect with Hong Kong and Macau and become one of the international financial centers in the Asia-Pacific region.

The increasingly sophisticated economy in Guangdong calls for a more accommodating and multi-level financial system. Also, the Guangdong government is following the instructions in the Opinions released by State Council in December 2013. Guangdong has developed the provincial level unified property rights exchange centre and several financial centres such as the Regional Financial Center of Shenzhen, Shenzhen Qianhai, Zhuhai Hengqin, the Guangdong High Tech Service Zone for Financial Institutions and the Guangzhou Nansha Financial Service Zone. The Guangdong High Tech Service Zone for Financial Institutions is a good example of financial centres as it is built to attract large global financial institutions, financial service outsourcing enterprises and new industries to set up headquarters, branches or service centres in the Zone. Also, various assets and equity exchange centers will be set up in Guangdong, such as an emission rights trading centre, intellectual property trading centre and cultural property trading centre.

Reforming Guangdong's multi-level capital markets

In constructing multi-level capital markets in Guangdong, there are the main board, the SME board and the growth enterprise market with the Shenzhen Stock Exchange and the REEM with different financial service zones in Guangdong. The REEM expands the share transfer system, which provides a necessary platform for the transfer and distribution of shares of unlisted public companies under unified supervision. The REEM provides a new platform for small and micro-sized unlisted companies to increase their financial value and raise capital. For example, it is easier for small and micro-sized companies to attract venture capital investment and complete fair transactions in such an open market. Considering the size and maturity of the companies in the REEM, it usually does not have strict rules regarding the government approval procedure, registration and exchange fee and compulsory disclosure requirements. Moreover, unlisted companies, which do not have the form of corporation such as partnerships, and limited liability companies can also trade in the Guangdong REEM. The REEM is helpful for developing the unlisted companies into larger-sized companies and preparing them to enter a higher-level market. It is also a new and effective market for those accredited investors looking for targets and investment.

As one of the benchmarks of the REEM and important to the construction of the regional financial centre in Guangdong, the Guangzhou Equity Exchange (GEE) officially opened in August 2012. In the GEE market, the listed companies can raise funds utilising their equity shares as well as by way of loans facilities. By mid-August 2014, over 780 enterprises have listed in the GEE and raised over Rmb2.65 billion worth of funds. At the same time, a series of favourable policies and convenient measures have been adopted for subsidies for enterprises' listing expenses. Through a government subsidy, enterprises will not increase the cost of financing after entering the GEE market. The GEE will influence economic development in the peripheral areas of the Pearl River Delta and the Pan-Pearl River Delta region so as to facilitate the formation of a new pattern of regional economic development characterised by mutual and complementary advantages.

Another striking example of the REEM is Qianhai Equity Exchange (QHEE) which aims to solve the financing problems of small and micro-sized enterprises. Operating in May last year, the QHEE was regarded as the second Shenzhen Stock Exchange. With an average of nearly 10 enterprises listing every day, it has become one of the most active regional over-the-counter markets. By mid-August 2014, over 3,800 enterprises have listed in the QHEE, according to figures compiled by its official website. The figure also shows the enterprises in Guangdong province accounted for 77% of the listed enterprises. The QHEE is expected to be the first exchange platform between small and medium-sized enterprises and foreign investors if relevant policies also open up to foreign capital and companies.

Meanwhile, as the third regional equity exchange, the Guangdong Equity Exchange (GDOTC) officially opened in July 2013. It mainly provides professional financial services to high-tech and innovative enterprises as well as small and medium-sized enterprises. In the GDOTC market, there are more than 800 enterprises registered and about 27 enterprises listed.

On August 21 2014, the CSRC issued the Provisional Measures for the Supervision and Administration of Private Equity Investment Funds (Provisional Measures). According to the Provisional Measures, the standard of qualified investors involved in private equity investment funds has been established and the rules of raising funds and operating private equity investment funds have been specified. These measures not only ensure relatively free space but also regulate management for all kinds of private equity investment funds.

A new investment system emerges

Through the strengthening of reform and further opening up of the capital markets, a new type of investment system takes shape in which investment is led by the market. Enterprises have autonomy in decision-making, financing methods are diversified, and efficient macro-economic adjustment and control will eventually be established. According to the statistics of the Office of Financial Affairs of the Guangdong Provincial People's government, there were 23 fund management companies and over 610 venture capital/private equity funds in the capital markets by the end of May 2014. The majority of the companies listed on the NEEQ are start-up technology companies. More and more venture capital/private equity funds have begun to hunt for investment targets in the NEEQ and REEM markets. The market-maker system has been introduced to help the listed companies and investors in reaching a win-win result in the NEEQ by the end of August. It is expected that the fast development of the NEEQ and REEM systems will bring great opportunities to venture capital/private equity funds and start-up tech companies in the coming years.


Aron Hu and Leo Li, Zhong Lun Law Firm, Guangzhou