JOINING THE LISTING SPREE: On July 26, a securtities regulator reviewed an application by Minsheng Securities Co. Ltd. as a sponsor for GEM listed companies (CFP)

On August 14, the first initial public offering (IPO) review committee of the growth enterprise market (GEM) was set up in Beijing, a milestone event in preparation for the launch of the GEM.

The committee, as a new department under the China Securities Regulatory Commission (CSRC), has been reviewing 105 IPO applications since July 26 when the CSRC opened the gate for submission. The CSRC indicated companies engaged in the fields of new energy, new materials, bio-pharmacy, energy conservation and environment protection, service and electronic information will win the green light before other IPOs.

Shang Fulin, Chairman of the CSRC, said in the inaugural ceremony of the committee that the IPO review is progressing in an orderly way, and the GEM will soon have its first client.

According to schedules of the regulatory department, the GEM will be launched in late October this year.

Initiating investor education

Reports indicate that the number of GEM trading accounts is on the rise. From July 15, when the first application for opening an account was handled, to August 14, more than 900,000 applications for account opening were submitted.

The Shanghai and Shenzhen bourses, based on an investigation, estimated that potential GEM traders could be as many as 20 million. More people are predicted to join the economic game in the future.

The CSRC vowed to keep a close eye on speculation, share price manipulation, disclosure of fake information and insider trading. Those involved in illegal actions will be punished severely.

The CSRC has also started risk-control education for investors. It requires GEM traders to have at least two years of stock trading experience, and investors should go to dealers' counters in person to open the accounts and sign risk disclosure statements. GEM accounts will be opened the next trading day. Securities dealers will assess the clients' risk tolerance capability and educate them on the potential risks of GEM trading. As for those whose trading experience is less than two years, the securities dealers will have special risk managers explaining potential pitfalls. Less experienced traders' accounts will be open after five trading days.

The CSRC management board is fully aware of the potential risks. Yao Gang, Vice Chairman of the CSRC, pointed out six major risks of GEM trading: operational risks of listed companies, integrity and credibility risks of listed companies, big share price fluctuations of GEM listed companies, technical risks of GEM listed companies, risks brought about by investors' blind investment, and potential risks of intermediary institutions.

Independent economic observer Pi Haizhou noted that compared with the above-mentioned risks, the biggest risk of the GEM comes from the GEM system and its supervision.

Pi said GEM listed companies might not perform as well as those on the main board. Most of the GEM listed companies will be small and medium-sized enterprises (SMEs), which are small in scale, weak in competence, and low in yields and credibility. Due to high operational risks, they used to have difficulties in acquiring bank loans, and such risks are writ large for their investors as well.

Second, in actual trading, the share prices of GEM listed companies, due to their small equity, can easily be manipulated by speculators. Additionally, many of the Chinese SMEs lack sufficient internal management, which makes GEM a breeding ground for insider trading. As a result, the interest of innocent investors might be dampened by those illegal activities.

Moreover, the exit mechanism of the GEM will be stricter than that of the main board, making it possible for companies to be quickly kicked out of the market if their businesses are fairing poorly. For instance, according to guidelines on IPOs in the GEM, listed companies will directly exit the market and won't have to go through the agency share transfer system for main board listed companies.

In order to raise efficiency, shorten the exit time span and avoid meaningless share-trading suspension, the GEM adopts a fast exit mechanism. If a listed company fails to provide annual and half-year reports at the required time, it will be forced out of the market in three months, as compared with the six-month allowance on the main board. If a company's net asset is negative, it will be temporarily suspended from trading in the market, and whether it can go back into the market will depend on its half-year report, instead of the annual report, giving it little time to overturn the situation.

Pi warned that GEM traders must be aware of the high risks and should protect their assets.

Hoping for a Chinese Microsoft

Even briefly mentioning the GEM prompts Chinese investors to think of big names like Microsoft, Intel and Google, symbols of the success of the American NASDAQ. Domestic investors hope the Chinese NASDAQ can create industrial heavyweights similar to those in the United States.