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SZSE Chinese bourse set to lure domestic flotations

With the market for initial public offerings opening up again, the scramble among bourses has started for the hundreds of Chinese companies planning to list to raise capital.

Small and medium-sized companies in China have in recent years opted to list on global exchanges. But now the fightback has started among Asian countries to grab a slice of the action – not least from China itself.

China appears ready to establish an equity market on its Shenzhen stock exchange for small and medium-sized companies, along the lines of London’s Alternative Investment Market (Aim).

Listing rules for the new market, called the Growth Enterprise Board, will take effect on July 1 but people close to the situation do not expect trading on the new board to begin for many weeks and possibly not before the national holiday on October 1.

Many Asian companies have opted to list in Europe or the US because of a perception there was greater liquidity in those markets.

However, many of the companies that listed on London’s Aim or Singapore’s junior bourse experienced poor analyst coverage and low trading volumes, which depressed the stocks.

The trend has now reversed amid a growing belief among Asian executives that they no longer need to list so far away from home to access capital.

Peter Alexander, of Z-Ben Advisors, an investment consultancy in Shanghai, says it is “just a matter of when the trigger is pulled” for the new Chinese market to be established.

Others caution that the plans are still dependent on investor reception of the resumption of IPOs on China’s main exchanges.

There are no official data detailing how many companies have plans to list in the new market but CY Huang, president of greater China investment banking for Taiwan’s Polaris Securities, estimates that there are at least 300 companies queuing up to be among the first to list on the new market.

Analysts say the new board should help plug a gap that exists in China’s capital market.

“For small and medium-cap companies, the only option now [for venture capital companies to exit an investment] is a trade sale . . . but it’s a long process,” says Cathy Yen, general manager of AsiaVest Partners, referring to the practice of selling shares/assets of a company privately to a strategic investor.

The new board will provide an IPO platform for technology and other small and medium-sized enterprises – Beijing policymakers put high priority on encouraging innovative companies.

China’s new market comes as the financial crisis is presenting a unique opportunity for other exchanges to challenge Nasdaq in the US as the destination of choice for start-ups, particularly among technology companies.

“Nasdaq has always been the first choice but that is starting not to be the case . . . now people are naturally forced to think about other boards,” says Tina Ju, managing partner of the Chinese arm of Kleiner Perkins Caufield & Byers, the US venture capital fund.

That is largely because of the difficulties of pulling off a successful public offering in current market conditions. There have only been two listings in Nasdaq so far this year compared with 11 over the same period last year, according to data from Thomson Reuters.

China’s new market comes as other exchanges in the region eye up similar opportunities.

Japan now has its own Aim market. A joint venture by the Tokyo and London stock exchanges, it received its licence this month and is targeting about five listings in its first year although the initial focus appears to be on Japanese companies.

The Taiwan stock exchange, recently revitalised by the island’s warming of relations with China, is also aggressively pursuing listings by Taiwanese companies that had moved to mainland China.

Chi Schive, Taiwan stock exchange chairman, says that, while “Shanghai and Shenzhen are respectable rivals . . . for the time being I don’t think that threat is very strong [in attracting Taiwanese companies]”.

While Japan and Taiwan are only now gearing up their efforts, other markets in Asia have made similar attempts before – with little success.

Singapore’s Aim-style exchange, known as Catalist, has failed to gain much traction since it was set up in December 2007 to replace Sesdaq, the city state’s secondary board.

Catalist has attracted few new listings since its launch, which Singapore Exchange officials blame on the global financial turmoil.

Similarly, Hong Kong’s Growth Enterprise Market (GEM) attracted some initial attention but trading volume has since fallen drastically.

For China’s new board, there is concern over how many of the companies lined up for funds “are genuine, viable long-term businesses” says Fraser Howie, China stock market expert and author of Privatising China: Inside China’s Stock Markets. “Is the competition driving standards lower?”

For many, China remains “a gamble market”. While some companies can fetch very high valuations, “the question would be how sustainable this would be and right now we just don’t know”, says Ms Yen.

Mr Huang says the biggest concern for prospective listings is that “China is the one stock market where you cannot control your [listing] time-frame” because of the government influence over market operations. “In China, the biggest risk is policy,” he adds.

Source: Financial Times, 23.06.2009 by Robin Kwong Additional Reporting by Patti Waldmeir in Shanghai, Lindsay Whipp in Tokyo, John Burton in Singapore and Sundeep Tucker and Xi Chen in Hong Kong

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