【Ｃｈｉｎａ　Ｂｕｉｌｄｓ　Ｉｔｓ　ＮＡＳＤＡＱ】made in China

　　Equity market expansion has brought significant investment opportunities to 　　the SME board, which is expected to become China"s NASDAQ
　　
　　China CAMC Engineering Co. Ltd., the first company to go public in China since the stock market resumed its financing function, was listed on Shenzhen’s small and medium enterprises (SME) board on June 19, with its price rising 332 percent on its debut.
　　When Microsoft was listed on NASDAQ 20 years ago, it barely reached the low threshold price for small board entry, with total assets of just $2 million and an equity price of only 15 cents. Yet in July 1999, Microsoft became the leader in the global software industry and the largest company by market value in the world, with a market value of $500 billion and a NASDAQ stock price over $100 per share.
　　Some people are expecting a Chinese counterpart of Microsoft can emerge on China’s SME board.
　　
　　Making a fortune for tech companies
　　
　　“Capital markets should serve those enterprises playing an important role in promoting economic development,” said Huang Huaguo, former NASDAQ Chief Representative in China.
　　So what are such enterprises in China?
　　According to statistics of the Ministry of Science and Technology (MOST), about 66 percent of patents are awarded to SMEs, which are also responsible for more than 74 percent of technological innovations and over 82 percent of new product development. SMEs have already become the mainstay of technological innovation.
　　However, SMEs have difficulty in financing. After the launch of the SME board two years ago, there are only 50 listed companies on the SME board, with accumulated finance of only 12 billion yuan and a market value of less than 50 billion yuan. Yet technological SMEs number 130,000.
　　Resumption of IPOs on June 19 this year may be seen as an opportunity for SME board expansion. It’s reported five companies that would qualify for the SME board are among the first batch of six IPO approvals.
　　In early June, the China Securities Regulatory Commission (CSRC) said that relevant departments are planning to speed up the process of SME board expansion by three IPOs per week. The actual speed is expected to be even faster. Suppose the average market value of newly listed companies is around 600 million yuan before the end of 2006. At a rate of three IPOs per week, the SME board will be injected with at least 24 billion yuan in the next three months. At this rate, the SME board’s floating market value will reach 70 billion yuan.
　　
　　Prime time
　　
　　According to Cheng Siwei, Vice Chairman of the Standing Committee of the National People’s Congress, the next step for the SME board is to establish a Growth Enterprise Market (GEM) and finally develop a multi-layered market system like that of NASDAQ.
　　Currently, the SME board’s scale and speed of development are inadequate to meet the needs of technological enterprises. Ma Haodong, assistant to the president of the Shenzhen Stock Exchange (SSE), has put forward four proposals:
　　-- Promoting innovation of the whole system, adopting flexible listing standards, simplifying financing procedures, enhancing financing efficiency and putting forward convenient measures in line with the development of technological enterprises;
　　-- Introducing the market maker rule;
　　-- Piloting the market-oriented exit system as soon as possible;
　　-- l Further exploring the interactive system between different market levels and realizing development of mutual support and coordination among different boards.
　　In April, an authoritative report pointed out that the external conditions for promoting the GEM board were already mature and from November this year to next May would be the prime time to do this. The best way of building the GEM board is to urge the SME board to transition to a GEM board, according to the report. The report, titled “A Study on China Growth Enterprise Market Board,” was written by a core organization composed of experts from the State Council, the CSRC, the MOST and the SSE, with Cheng Siwei as the chief advisor.
　　
　　Imitating NASDAQ
　　
　　How can the SME board emulate NASDAQ? “High-tech, high growth and innovation, are general characteristics of NASDAQ,” concluded Huang Huaguo. He pointed out NASDAQ had succeeded by meeting the needs of U.S. economic development and providing financing service for enterprises capable of best promoting economic development.
　　In the United States, NASDAQ is the cradle of the new economy and a propelling engine for hi-tech enterprises. According to statistics, 93.6 percent of listed software companies, 84.8 percent of listed semiconductor companies, 84.5 percent of listed computer and derivative equipment companies, and 81.7 percent of listed telecommunication companies are listed on NASDAQ. These companies include Microsoft, Intel, Yahoo, Apple and Dell.
　　Huang pointed out that the design of every market should be consistent with economic development of the country. “If a market can’t reflect the objective situation of economic development, the market itself should be reviewed.”
　　In 2005, the SSE investigated 3,328 key SMEs, with the result that about 97 percent of enterprises were alienated from the capital market, even though they were qualified as growth companies.
　　The initial design of the SME board followed the main board’s listing standards, which gave those SMEs eager to finance an impression that the SME board was hard to enter.
　　However, the situation is entirely different on NASDAQ, with listing standards fairly diverse. NASDAQ has two boards, the National Market and the Small Cap Market, the latter of which is now renamed the Capital Market. They have different listing standards. The National Market has a relatively low requirement on enterprise profitability. For enterprises with equity of $15 million, it only requires $1 million net income in a new accounting year or two among the past three accounting years. There is no requirement on profitability for those enterprises with equity of more than $30 million.
　　Huang said that China’s SME board should make a set of standards of listing requirements and management, which is consistent with its own orientation.
　　
　　Regulation first
　　
　　Flexible listing but strict regulation after listing is NASDAQ’s method.
　　For instance, NASDAQ’s National Market makes no requirements on enterprise profitability for those enterprises with equity more than $30 million, but requires companies to have open prices of more than $5 when listing and not lower than $1 in future listings. If a company’s stock price does not meet the above requirements, it will be downgraded to the Capital Market or de-listed and placed on the over-the-counter bulletin board (OTCBB). Conversely, if a company listed on the Capital Market performs well, it may apply for listing on the National Market once it meets the needs of the National Market and passes a relatively stable observation period.
　　In fact, the NASDAQ daily surveillance is quite effective, with a vast array of sophisticated automated systems reviewing each trade and quoting prices online on a real-time basis, taking into account rumors, news, emergency incidents and information from around the world. This helps to identify unusual trades. Once there is a problem, it will be dealt with according to its graveness and urgency.
　　Huang also noted that a key point to the success of the U.S. capital market is that the U.S. law protects only investors. If you want people to invest in a market, you must make them trust the market and believe that the law protects their interests.
　　Huang considered that regulation of China’s SME board needs to adhere to principles of self-discipline and accommodate the present law. But Huang emphasized that it is the responsibility of the market to regulate listed companies, with the ultimate goal of protecting investors.
　　
　　A venture capital fund exit system
　　
　　NASDAQ has taken on the responsibility to provide not only a convenient financing channel for SMEs but also an exit system for venture capital (VC) funds since its establishment.
　　Similarly, design of China’s SME board can also incorporate an exit system for VC funds, according to Huang.
　　Statistics show that as of 2005, 553 VC projects had exited, of which 55.9 percent exited through mergers and acquisitions (M&As) and 33.1 percent through listing. Among foreign-invested VC projects, 35 percent exited through M&As and 58 percent through listing. Among domestic-funded VC projects, 69 percent exited through M&As and 17 percent through listing.
　　Among 183 projects exiting through the stock market, 76 percent exited through overseas capital markets and 24 percent through domestic markets.
　　A lack of an exit system thus hinders the long-term development of the local VC fund market, as evidenced by the above statistics.
　　Huang held that domestic VC fund has requirement of exiting through domestic market, and “it should be a responsibility of the SME board.”
　　
　　Adopting the market maker rule
　　
　　NASDAQ is famous for its Market Maker Rule, under which each listed company has an average of 15 market makers, while a company to be listed should have at least three market makers as guarantee. These market makers include investment banks, brokerage companies, brokers or independent stock traders, whose responsibility is to stand ready every second of the trading day to provide an ask and bid price. So, at NASDAQ, buyers and sellers need not appear simultaneously, and the market maker can affect transactions for them both.
　　Huang considered that this “Market Maker Rule” plays an important role in activating market trades, increasing liquidity and maintaining market stability. The introduction of the Market Maker Rule can also be feasible in the development of China’s SME board by implementing strict regulations at the outset.
　　DISCLAIMER: The information contained herein is based on sources we believe to be reliable, is provided for informational purposes only, and no representation is made that it is accurate or complete. This briefing should not be construed as legal, tax, investment, financial or other advice, and is not a recommendation, offer or solicitation, to buy or sell any securities whatsoever.
　　
　　Blueprint for China’s SME Board
　　
　　Famed as “the Father of the GEM Board”, Cheng Siwei, Vice Chairman of the Standing Committee of the National People’s Congress, has had a clear plan for China’s SME board since 1998.
　　Under his plan, the SME board would be developed in accordance with three principles. First, do not lower the entry qualification while selecting hi-tech enterprises to be listed on the SSE; second, lower the threshold for more enterprises to enter; and third, establish a second-board market when conditions are met.
　　If this strategy comes to fruition, a multi-layered capital market similar to NASDAQ would be formed, including three markets: a first-board market (Main Board Market); a second-board market (Small Cap Market or Capital Market); and a third-board market (OTCBB).
　　(Xinhua Finance)

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