Shanghai's New Technology Board Gets off to a Strong Start
April 11, 2019 | BY
Marilyn RomeroWith streamlined and registration-based rules issued last month, the new Sci-Tech Board is rapidly attracting IPO applications.
Since it was first officially announced last November by President Xi Jinping, Shanghai's new Science and Technology Innovation Board, or Sci-Tech Board, has made rapid progress. The China Securities Regulatory Commission, or CSRC, and the Shanghai Stock Exchange, or SSE, implemented new rules for its governance in the first week of March this year. By April 2, the SSE announced that it had already accepted 37 companies' applications for listing, and these companies will now go on to the second stage of audit and inquiry before they can successfully be listed on the Sci-Tech Board.
A main purpose of the new board is to provide a much needed source of local finance to help new innovative companies develop, without resorting to listing overseas. China has some of the world's biggest technology companies, but many are listed in the U.S. and Hong Kong. To attract companies to the new board, it has relaxed rules on listing and trading, moves that may also be extended to other exchanges, according to a Bloomberg report. It will also speed up the listing process. China currently uses an approval-based system for initial public offerings, or IPOs, which can take many months or years to complete.
The new board, instead, uses a simple registration-based vetting process for IPOs. Fang Xinghai, deputy head of the China Securities Regulatory Commission, has said that the SSE will complete the application vetting process in less than six months, and the CSRC will finish the same process in 20 working days. It also removes limits on the pricing of IPOs and has no caps on first-day trading gains, nor are companies planning to list required to be profitable, although they must meet minimum requirements for market value, revenue, R&D or cash flow.
To counterbalance the benefits of a less rigorous IPO system with the need to protect against fraud, regulators have also required sponsoring brokerages to invest in the companies and lock-in their capital for a fixed period of time. However, according to Bi Mingjian, the CEO of China International Capital Corp., or CICC, China's largest investment bank, the new regulation for sponsoring brokerages to invest in the companies is temporary, and will be subject to amendment.
Market response, so far, has been strong. This is, in part, because China has a huge number of tech startups. The Haidian district of Beijing alone has 148,600 tech firms, and is expecting revenues of more than Rmb2 trillion ($288 billion) by 2020, according to brokerage Minsheng Securities Co.
Chinese authorities are also hoping that the new regulations will ensure that the Sci-Tech Board avoids running into the same problems of China's two other technology-focused platforms that have languished in recent years. ChiNext, based in Shenzhen, has about 750 members which are mainly small technology firms that were profitable at the time of listing; and the Beijing-based National Equities Exchange and Quotations, or NEEQ. Previously known as the New Third Board, which it is still generally called, it is China's largest over-the-counter market, and has no requirement for profitability to list. Although it has more than 10,400 companies on its books, trading turnover is now very light.
The Sci-Tech Board is already beginning to disrupt the NEEQ. A growing number of companies are actively seeking to transfer from the latter to the new board, according to a Reuters report. NEEQ-listed Jiangsu Beiren Robot System Co and Jiangxi JDL Environmental Protection Co, have already applied for a listing on the new board, and Certusnet Information and Technology Co is pending its board approval to do the same. “Trading volume is tiny on the New Third Board, and the market offers little help in terms of financing,” said Wang Qing, vice president of Beiren Robot.
Peng Hai, an analyst at Lianxun Securities, estimates that 428 out of the companies currently traded on the New Third Board are qualified for the new tech board. Although the NEEQ has a low listing threshold, it is not open to public investors, resulting in poor liquidity.
With asset managers rushing to launch tech board funds, and retail investors opening trading accounts, there are a few concerns that the new board will replicate the boom-and-bust cycle experienced by the NEEQ. However, market sentiment is generally bullish. “We think this could prove to be the boldest reform undertaken so far in China's capital markets,” wrote HSBC strategist Steven Sun in a recent report. “We also think it is one of the most significant moves in China's supply side reform of the financial industry.”
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