After a 10-year deliberation, China's securities watchdog finally gave a nod to the launch of the long-awaited Growth Enterprise Market (GEM), providing timely relief to small businesses unable to get easy bank loans.
Modeled after the U.S. Nasdaq market, the GEM segment is designed to help China build multilevel capital markets and offer a new financing platform for cash-strapped startup and small businesses that show solid growth potential, especially technology companies.
CRADLE OF GROWTH: China will launch its long-awaited Growth Enterprise Market at the Shenzhen Stock Exchange around August (CHENG XIN)
Furthermore, the GEM will help address the financing difficulties of small and medium-sized enterprises (SMEs).
"The growth board will serve mainly SMEs that cannot meet the qualification requirements for main board listing and provide them a financing channel in order to survive the crisis," said Yao Gang, Vice Chairman of the China Securities Regulatory Commission (CSRC) at a press conference.
No Nasdaq counterpart
Startup companies, investors and venture capitalists have waited a decade for a true growth board in China. But the one the Shenzhen bourse will launch around this August will not be a replica of the Nasdaq, because it will have listing thresholds on candidates' profit track records.
"It's a market serving growth enterprises that have already proven their earning power," said Liu Jipeng, professor with China University of Political Science and Law.
The securities regulator has lowered the listing thresholds for GEM candidates compared with those on the main boards in Shanghai and Shenzhen in terms of capital strength, revenue and profit track record. But a true growth board, such as the Nasdaq, the second board of the Hong Kong Stock Exchange and the Alternative Investment Market (AIM) of the London Stock Exchange, has no profit or revenue requirements.
Liu said the GEM to be launched this year is the second step that China has taken towards establishing a Chinese Nasdaq.
After the dot-com crash at the Nasdaq in 2000, Cheng Siwei, then Vice Chairman of the Standing Committee of the National People's Congress, detected the high risks of having a growth board and emphasized a "prudent and reliable" approach to GEM launch. He proposed a "three-step" approach to establishing the GEM in 2002. Under the proposal, China first would launch an SME market, lower the listing thresholds of the SME market, and separate the GEM function to be an independent board.
China approached the matter prudently, because it believed a second board market should be a real alternative to the main board with stricter requirements. For example, the United States introduced the Nasdaq more than 150 years after the country established a main stock exchange when the main board had shrinking applications of initial public offerings (IPOs), Liu said.
"It's quite a different situation in China," he said. "Decades of high economic growth have accumulated large IPO demands in China, and some of them have just found access to fundraising in the capital markets in recent years."
The CSRC detailed the qualification requirements of the temporary regulations for GEM IPOs on its website on March 31. The regulation will take effect on May 1.