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Growth enterprise board can be hope for SMEs

By Zhou Yan (China Daily)
Updated: 2008-04-21 11:51

The launch of long-awaited growth enterprise board market in Shenzhen has brought cheers from the thousands of private-owned enterprises in Wenzhou in the heartland of the Yangtze River Delta region.

To these small- and medium-sized enterprises (SME) that are feeling the pinch of the government's tight money policy, the growth enterprise board, which promises to provide a new source of capital, is a shining ray of hope.

This port city, located in southeastern Zhejiang province, is best known as the "cradle" of private enterprise.

It plays host to more than 300,000 private firms engaging in a wide range of manufacturing activities. Despite the wealth they have created, only five enterprises in Wenzhou have obtained a stock exchange listing.

The listing rules are either too stringent or irrelevant to the private enterprises that are distinguished by their high growth potential rather than by their past performance.

"The growth enterprise board is perfectly tailored for us," says Zhou Dewen, chairman of Wenzhou SME Development Association.

"In the past, most small businesses have not been qualified to list because of the high profit requirement of the main board," Zhou says.

Market financing

The rigid listing conditions have forced many entrepreneurs to turn to other financing channels.

Until now, non-governmental loans in the local finance market have been the primary sources for small businesses, Zhou says.

"It's not the best choice because of the higher cost and greater risks," Zhou says.

Jiang Hua, general manager of Shanghai Rongcheng Management and Consulting Co says that small businesses find it harder to borrow money from banks than larger companies.

"China's State-owned commercial banks give their priorities to big or hi-tech businesses, and real estate is required as collateral on a loan," Jiang says.

But the most SMEs have developed from a small studio or office without a long and successful track record that can win the trust of potential investors or banks. And they are rarely able to provide real estate property as security.

"About 65 percent of entrepreneurs borrow money from loan sharks," Jiang says. While they carry high interest rates, these funds also have simpler procedures, and lower collateral requirements.

It's a popular approach to raise money in Yangtze River region, Jiang says.

Businessmen have their circles and people from the same town or village usually secure their funds through guanxi (personal and professional relationships), he adds.

"The major role of the proposed growth enterprise board is to help young enterprises attract capital injections from public investors by using the market discipline necessary for sustained growth," Zhou says.

According to a report from the Organization for Economic Co-operation and Development (OECD), SMEs are the dominant form of business organization, "accounting for over 95 percent and up to 99 percent of enterprises depending on the country".

In OECD countries, SMEs created between 60 to 70 percent of the net jobs in 2006. The number is likely to be higher in 2007.

Government statistics show that there were 42 million SMEs across China by mid-2007. They contributed 50.2 percent of China's tax revenues.

"SMEs are going to have profound impact on the future development of China, and the capital support is crucial for us," says Tu Yuquan, chairman of Wenzhou-based Zhejiang Zhongkai Electric Equipment Co Ltd.

Zhongkai, founded in 1995, is a low voltage electric appliances manufacturer with plans to list on SME board or the growth enterprise board soon. Its KB0 series control and protective switching devices have been exported to the US, UK, Argentina, Russia and some Eastern European countries.

"If we can successfully launch our IPO, we will be able to develop our core businesses with the aid of innovative solutions," Tu says.

In Wenzhou there are three to five small businesses planning to launch their IPOs on the growth enterprise board. Enterprises involved in hi-tech solutions, and new growth industries will be the most likely choices, Zhou says.

Ten to fifteen companies in Zhejiang probably will be launched on the growth enterprise board, Zhou adds.

Look before you leap

However, the path to the growth enterprise board is not strewn with flowers.

While an IPO is a seemingly attractive financing option for fast-growing small businesses, Zhongkai's Tu also insists that the decision to list is "not a must-do mission".

Growth enterprise boards are not new for the Hong Kong and overseas stock markets, but only a few firms have gained impressive success.

There are cases of companies leaving the board, says analyst Mao Nan from Orient Securities.

"Enterprises have to take risks, and there is no guarantee whether businesses can raise money from the growth enterprise board," Mao says.