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UPDATED: January 3, 2014 NO. 1 JANUARY 2, 2014
Funding SMEs
Expansion of the new third board and easier access to market capital will ease financing woes
By Lan Xinzhen

A financing platform

A report by Great Wall Securities Co. Ltd. says although the new third board has existed for more than seven years, its development is still slow. Compared with other boards, the new third board is smaller in size. Moreover, 88 percent of China's SMEs are not listed on the new third board and most of these enterprises lack financing channels, therefore China's new third board has great potential for development.

"SMEs, especially the innovation-based, startup and growing micro- and small enterprises, will directly benefit from the expansion of the new third board," said Wang Yong, an analyst with CITIC Securities Co. Ltd.

Wang noted that by selling shares on the new third board market, SMEs can effectively solve their financing problems.

Financing difficulties have long constrained the development of China's SMEs. To get the money for development, some SMEs even have to turn to loan sharks.

According to figures from the Ministry of Industry and Information Technology, China now has more than 13 million SMEs, accounting for 98 percent of the country's total number of enterprises. Most of the SMEs are facing financing difficulties. The Chinese Government has tried various means to solve the problem, including requiring commercial banks to grant more loans to SMEs.

Wang thinks the government should, after concluding the pilot program, extend the new third board system to the whole country so that SMEs will have other financial channels than bank loans and private lending.

Compared with the main board, the SME board and the growth enterprise board, the new third board mainly provides a platform for enterprises with simple business models and of small size. Since the new third board has no profit requirements on the listed companies, it offers a legitimate and convenient direct financing channel for the enterprises which failed to reach the listing standards of the main board.

Wang estimated that the new third board will attract at least 1,000-1,500 enterprises in 2014 and there will be around 10,000 enterprises listed on the new third board in the next five years.

A report by Changjiang Securities Co. Ltd. noted that the expansion of the new third board can also improve the governance capability of SMEs.

According to the State Council, companies listed on the new third board are allowed to lose money, but they must fulfill the obligation of information disclosure, and the disclosed information should be authentic, accurate and complete. To meet this requirement, SMEs need to establish sound corporate governance systems. During the listing process, SMEs can, with the guidance of professional agencies, improve their corporate governance and management mechanisms. After being listed, SMEs can improve their governance capability by strictly obeying the information disclosure system.

Main board unaffected

Following the announcement of the new third board expansion, China's A-share market slumped briefly. The CSRC tried to assure investors, saying that most of the third board-listed enterprises are small in size and the financing volume is also small, so the expansion of the new third board will not divert capital from the A-share market. However, investors seemed to ignore the message.

The CITIC report says the rapid development of the new third board may divert capital flows to the secondary market in the Shanghai and Shenzhen exchanges. However, the impact of the expansion of the new third board on the liquidity in the stock market will be very limited indeed.

Compared with the main board, the new third board is much smaller, and the successfully traded volume only accounts for 1.5-3 percent of the total market value of listed companies. Even if the transactions become more active after the system is improved in the future, the traded stocks will account for 20-50 percent of the total market value. In the next three to five years, the new third board market will only need 13 billion-67 billion yuan ($2.13 billion-10.97 billion) of funds each year. In contrast, the trade volume of the main board in Shanghai and Shenzhen on December 24, 2013 totaled 85 billion yuan ($14 billion).

Since the approval procedure for the new third board is simple, and the State Council statement further simplifies it, many SMEs with plans for listing on the main board will move to the new third board, alleviating capital pressure on the main board.

Moreover, the financing function of the new third board is currently not well developed, therefore it will not significantly divert capital flow from the main board.

The CITIC report points out that in the medium term, the new third board will mainly affect the growth enterprise board.

According to the report, the recent decline of China's A-share market is more related to the U.S. Federal Reserve's taper move, instead of the expansion of China's new third board. Coincidently, the Federal Reserve announced to reduce its monthly purchase of treasury after China announced to expand the new third board, creating anxieties among investors over a liquidity squeeze and dragging down the A-share market.

Email us at: lanxinzhen@bjreview.com

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