Beijing bourse seen as elixir for capital market reform

The establishment of the Beijing Stock Exchange will help perfect China's capital market system and improve its function of serving the real economy, paralleling the importance of the launch of the STAR Market in Shanghai.

President Xi Jinping announced on Sept 2 that China will set up a stock exchange in Beijing and build it into a major base for serving innovative small and medium-sized enterprises, or SMEs.

This came after Xi announced in November 2018 that the country would launch the sci-tech innovation board, or the STAR Market, in Shanghai and pilot the registration-based system.

The establishment of the Beijing Stock Exchange will mark a major breakthrough in the reform of the National Equities Exchange and Quotations (NEEQ) system, thus strengthening the ability of capital markets to support the real economy and powering China's economic transformation into an innovation-driven growth mode.

Since its debut in 2013, the NEEQ system, also called the new third board, has served as a main platform of the capital market system to meet the financing needs of SMEs. The board offers SMEs not qualified to become listed companies on bourses in Shanghai and Shenzhen a platform to sell their shares.

In its early development stage, however, the new third board faced difficulties in fully playing its financing and investment functions and suffered from lukewarm liquidity as well as voluntary exits of firms from the platform.

This predicament could be attributed to the variance in the quality of the firms traded on the board, some of which had poor fundamentals, as well as the stringent standards of investors qualified to trade on the board that restricted the scale of funds available for trading.

Market order has been gradually rebuilt on the new third board as a series of reform measures were taken since 2019, such as easing standards for qualified investors and setting up the NEEQ Select, the highest tier of the board.

As of Sept 2, there were 7,304 firms that are traded on the new third board, whose total market capitalization amounted to nearly 2 trillion yuan ($309.8 billion). The 1,278 firms from the information technology sector contributed about one-third of the market capitalization, followed by the 1,170 industrials that accounted for more than a quarter of the market capitalization.

More than 1.7 million qualified investors have been registered on the system, 7.3 times the number seen as of the end of 2019.

Despite some reform successes, there is still room for the new third board to better serve innovative SMEs.

During the 14th Five-Year Plan period (2021-25), China aims to nurture about 10,000 SMEs into "little giant companies". The term refers to leading SMEs that specialize in niche sectors, command a high market share, and boast strong innovative capacity and core technologies.

There are more than 4,700 "little giant companies" so far in China, said the Ministry of Industry and Information Technology.

Incomplete statistics show that nearly 800 enterprises now traded or previously traded on the new third board are included in the MIIT's list of "little giant companies".

The establishment of the Beijing Stock Exchange will mark a leap forward in the reform of the new third board, lifting its status to the third national securities exchange equal to established bourses in Shanghai and Shenzhen.

A set of fundamental rules covering listing, trading, delisting, continued supervision and investor qualification will be formulated for the exchange and all will cater to the features of innovative SMEs, strengthening the capital market's function of supporting innovative SMEs and elevating the efficiency of resource allocation.

Needless to say, promoting the development of innovative SMEs is critical for China's high-quality economic development as they contribute greatly to the nation's pursuit of boosting the manufacturing sector, addressing bottlenecks in core technologies and promoting an innovation-driven growth mode.

From a different perspective, the Beijing Stock Exchange is also expected to serve as a game-changer of China's financial system, which is now dominated by the banking sector.

Widely used among East Asian developing economies, such a structure features an advantage of efficiently funneling resources into the development of key industries and has enabled China's great achievement of reform and opening-up over more than four decades.

The strong banking sector has also enabled capital accumulation at a rapid pace, addressing the shortage in funds, which used to be a key hurdle facing the Chinese economy.

But looking ahead, capital markets should play a bigger role in empowering China's innovation-driven economic development.

Several studies have found that capital market development will encourage the innovation of high-tech companies and enterprises reliant on external financing. The financing mode of overreliance on bank loans, instead, will affect innovative activities of those companies.

Innovation is a high-risk activity with the potential for high returns and asymmetric information. Asymmetric information results when one party in a transaction is in possession of more information than the other.

Therefore, innovative enterprises in sectors like the internet, artificial intelligence and big data have more difficulty accessing bank loans and other types of debt financing in their early development stages.

They rely on the capital market as their main financing channel where failures can be tolerated in the short term for the sake of major long-term returns.

The establishment of the Beijing Stock Exchange will mark another milestone in the development of China's multilayered capital market system, following the launch of the STAR Market and the registration-based reform of the ChiNext board.

The new exchange will serve as a major base for facilitating the growth of "little giant companies "and complement the functioning of the Shanghai and Shenzhen exchanges, which mainly meet the financing needs of more mature enterprises of a larger scale.

All this will help transform China's financial system into one that is more supportive of China's economic upgrade that eyes an innovation-driven growth mode.

Shao Yu is chief economist and Chen Dafei is a macroeconomic researcher at Orient Securities.

The views don't necessarily reflect those of China Daily.