The State Council announced on December 14 an expansion of its over-the-counter (OTC) market, a share transfer system for small and medium-sized enterprises (SMEs), further revealing China's efforts to build a multilevel capital market.

Yet, there are still some misconceptions on the OTC market, also known as the New Third Board.

Firstly, some people think that the third board is another stock exchange alongside the Shanghai and Shenzhen stock exchanges due to the fact that it has been clearly designated as the third national stock exchange. However, as opposed to investment outlets for both ordinary people and institutions, the New Third Board is geared toward institutional investors. In this sense, the expansion doesn't have anything to do with attracting common investors to trade stocks like the Shanghai and Shenzhen stock exchanges, but allowing qualified enterprises to get listed on the New Third Board.

Secondly, it is worth mentioning that the New Third Board is designed to facilitate direct financing and capital withdrawal for SMEs, rather than providing a trading place for stock investors.

As an OTC market, it lags behind the Shanghai and Shenzhen stock exchanges in terms of liquidity. Since companies listed on the New Third Board are exposed to more risks, they should not have liquidity equal to public companies. Similar cases can be seen in more developed markets. In the United States, enormous enterprises are traded in an OTC market with poor liquidity, and only a few of them eventually achieve success in building up their strength there.

It's ridiculous to believe the expansion of the New Third Board means more active stock transactions and more capital investment. Given the original intention of its establishment and international conventions, the New Third Board doesn't aim to stimulate transactions, for it can only attract venture capital investment that has a high-risk tolerance, rather than short- and medium-term funds which account for the bulk of trading on the Shanghai and Shenzhen stock exchanges. This explains why the expansion will not compete with the main board.

Lastly, the expansion has been mistakenly taken as a blow to the ChiNext, the growth enterprise board. Some people believe that when large numbers of enterprises transfer their stock listings to ChiNext, share prices will inevitably drop. Indeed, the New Third Board is considered an incubator for innovative businesses. Enterprises listed on the board will naturally head toward the goal of being listed on ChiNext or SME board. Nonetheless, the New Third Board will not impose pressures on the other two boards. Theoretically, as long as the market forces are dominant, the expansion of the ChiNext and SME board will not be affected by the New Third Board.

Misunderstandings about the New Third Board may lead to irregularities on the stock market. Therefore, to better cope with the prospective expansion of the New Third Board, the public should develop a correct understanding of it.

This is an edited excerpt of an article by Gui Haoming, Market Research Director of SWS Research Co. Ltd., originally published in National Business Daily