Shot in the arm for SMEs

The launch of a trading board for start-up companies on May 1 will be a welcome development for Chinese enterprise.

Though introduction of a board for small and medium-sized enterprises (SMEs) is unlikely to immediately sate their burning need for funds, the new direct financing platform will give numerous Chinese start-ups a much-need shot in the arm.

Small as they are, China's innovative companies and growth enterprises have constituted a key force in job creation and economic growth.

And the future of the Chinese economy may depend on them.

However, finance has long been inadequate to support these SMEs' growth because of structural problems with China's financial institutions and markets.

On one hand, the dominance of big state banks has made it difficult for small businesses to obtain bank loans, particularly as the global financial crisis and domestic economic slowdown add to Chinese banks' worries about the risk of lending to small companies.

Admittedly, banking regulators have been keenly aware of the problem and recently urged domestic banks to increase credit to SMEs.

But given the high risk and low efficiency of such lending, SMEs still cannot expect too much from big State banks.

On the other hand, the strict requirements for capital, profitability or track record have practically rendered the country's stock market an exclusive direct financing platform for large State-owned enterprises.

The bursting of the global dotcom bubble in 2000 understandably delayed China's introduction of a second board for SMEs.

It is fortunate that China's securities regulators have refused to be daunted by recent sharp falls in domestic stocks and consequently ignore the urgency of opening a direct financing channel for the country's small and medium-sized enterprises.

Undoubtedly, the launch of such a bourse similar to the Nasdaq Stock Market can considerably improve the structure of China's capital market and expand the market's depth and width.

With the support of more direct financing, it is predictable that some of China's most innovative companies and growth enterprises will have a much better chance of growing into industry leaders.

Of course, in the meantime, securities regulators should be ready to step up supervision over those listed on the new board.

They must remember that their tough love is both a must for the sound development of the new board and to meet their obligations to investors.

(China Daily 04/01/2009 page8)