Right time to set up a new stocks board?

A growth enterprise market for small companies in China has been a hot topic. The growth enterprise market (GEM) is a stock market originally set up by the Stock Exchange of Hong Kong for growth companies that do not fulfill the requirements of profitability or track record. Is this the right time to set up a growth enterprise market on the Chinese mainland?

Yes

Zhang Tingbin, deputy editor-in-chief and a columnist for China Business News:

The introduction of a growth enterprise board in the stock market can be a breakthrough for China to fund innovative enterprises. It is also the key to removing financial blockages in funding for emerging companies.

China has the highest savings rate in the world. The country also has the highest private loan interest rate, topping off at 60-80 percent. There is enough money in people's pockets and a high P/E (price-earning) ratio in the stock market, but private businesses, especially those innovative ventures, are facing great difficulties in raising money.

Most growing businesses in China began with manufacturing and processing for export for multinational brands and companies. Chinese small and medium-sized enterprises (SMEs) do not have the financial resources to develop their own brands especially during the worsening financial crisis.

We need help them in three ways: First, push forward the launching of the GEM to clear away obstacles for financing of SMEs; second, giving the green light for small private loans; third, support outstanding SMEs and help them build their brand and an international sales network.

There are concerns that the GEM may have an adverse effect on the main board. I believe that only a limited amount of money from China's substantial savings and bank reserves will be needed to activate the GEM. The main board will also benefit from the restored confidence in the market.

I am anxious about the management and supervision of the GEM. If the false financial statements and market manipulation on the main board spills over into the new board, it will be even worse than if there were no new board.

My suggestion is to introduce the shareholder class action system. The accused should take the burden of proof. This has been proved effective in US capital markets. Under such a system, investors have the right to file a lawsuit against a listed company if it leaks important information and causes an irregular fluctuation of share prices. We must ensure a fair and just operating system for the soon to-be-unveiled growth enterprise market.

No

Pi Haizhou, an independent financial analyst:

There has been much clamoring for a growth enterprise board market to be unveiled as soon as possible. But He Qiang, a member of the National Committee of the Chinese People's Political Consultative Conference (CPPCC) said during the just-concluded annual session of CPPCC that it is not the proper time to introduce this kind of market.

He, who also heads the Central University of Finance and Economics' Securities Futures Research Institute, said the market remains weak compared to two years ago, and current investor confidence is still at a low level.

I agree with He Qiang. Since November 2008, and especially after the Spring Festival in 2009, the mainland stock market has rallied, but it is unable to make up the losses that investors suffered in the bear market of 2008.

The lack of confidence has also scared off potential stock market investors. They would rather wait and see.

What the market needs at present is time to restore investor confidence. That will not happen if a GEM is launched now. And, it will only serve to demonstrate market eagerness to raise money, regardless of whether it would benefit investors.

The companies to be listed in the growth enterprise board are mainly vulnerable SMEs. It is difficult to foresee their future performance as they are having a hard time getting bank loans. One thing is certain and that is these prospective SMEs to be listed on the GEM have fared no better than those that have already gone public.

At the end of February, a total of 161 listed SMEs on the main board had released their 2008 annual reports. A large number saw their grow flattening, and 29 suffered losses in the last quarter of 2008 due to the financial crisis, despite robust growth in the first half of the year.

Moreover, the current IPO system needs to be reformed. The unveiling of a growth enterprise market had better wait until the reform of the IPO system on the main board is completed.

(China Daily 03/23/2009 page2)