To GEB or not to GEB, that is the question

After the first proposal a decade ago and years of anxious anticipation, China's long-awaited NASDAQ-style second board is finally within view. The China Securities Regulatory Commission, the country's top stock market watchdog, has published rules governing listings on the board, known as the Growth Enterprise Board (GEB). The rules took effect on May 1. The Shenzhen Stock Exchange, where the GEB will be located, recently released detailed regulations on issues such as auditing committees, sponsors, information disclosure and exit channels. Some media reports said the GEB could be launched as early as August.

The GEB will focus on finance-starved innovative start-ups with strong growth potential. Some people said the board could help solve Chinese small- and medium-sized enterprises' difficulties regarding access to capital. The move has also been widely applauded by venture capitalists in China. But others have expressed skepticism regarding the board's prospects, saying that it will place higher demands on regulatory capabilities and is likely to become a super-speculative market.

The following experts and company officials gave their views on the China Knowledge@Wharton and Sina websites.

PROS

Feng Jun, president of Beijing Huaqi Information Digital Technology Co

"There are a lot of SMEs on the Chinese mainland. If they can be listed in Shenzhen, they won't need to go to the United States or Hong Kong. Individual Chinese stock investors will also understand these companies better. We hope we will have an opportunity (for listing) when the board is launched."

Wang Shouren, secretary-general of Shenzhen Venture Capital Association

"Launching the GEB will allocate financial resources more effectively and promote the transfer of resources to productive uses, which will be an important driving force for a second industrial revolution."

Joe Tian, managing partner of DT Capital, a Shanghai-based venture capital and private equity company

"Demands for financing for public companies or to exit the public market have accumulated to the degree that they cannot be ignored by decision-makers. The GEB is certainly a good thing. The more exit channels there are, the better for our returns, and the greater the value of investments. It's as simple as that."

CONS

Fisher Zhang, manager of a Hong Kong investment fund in Shanghai

"China's stock market is like a roller coaster - it gets bumpy fast and then plummets, with few returns for investors. The companies listed on the GEB will mostly be mediocre ones and they will already be priced at a premium in the primary market. My view is that there will be some value for investors in the short term, but I am not sure about the long-term value. Regulation of our main board is not yet well established. There is a lot to be done (regarding information disclosure and insider trading). The main board has not addressed these issues yet. How can we expect the GEB to be able to do this?"

Lu Zhiming, a capital markets researcher at Fudan University

"It's more important to improve the listed companies on the main board and to establish the mechanism of the main board. Otherwise the GEB will be like any other super-speculative market and will not bring true value to real investments in high-tech startups. One of the main reasons why some companies cook their books is because the penalties are too light. Regulators have to adopt much more severe means of punishment in today's environment."

Pi Haizhou, financial commentator

"The biggest problem for the GEB is regulation. The regulatory efforts should be 100 times as intense as those on the main board, otherwise any company on the GEB could be a bomb. Investors should not pay for the delisting of a company. "

(China Daily 06/01/2009 page2)