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I’m very pleased to participate in this program promoting Shenzhen’s financial industry to better serve the real economy. On behalf of Shenzhen Stock Exchange (SZSE), I would like to extend my warm congratulations on the opening of Qianhai Equity Exchange (QEE).
Chinese economy has become the second largest in the world, exerting higher requirements for financial services. As China accumulates the annual savings of US$ 4 trillion, Chinese residents and institutions have skyrocketing demand for investment and wealth management. Therefore, there is abundant potential capital supply. On the other hand, China has more than 13 million small and medium-sized enterprises (SMEs) and 34 million self-employed businesses, and numerous innovative and entrepreneurial activities expecting support from the capital market. Recently, we have held the promotional activities of “Realizing Chinese Dream and Building up an Upgraded Multi-tiered Capital Market” in different cities. The response indicates urgent need for the capital market in support of the development of real economy. They not only need support from the equity market, but are hungry for bond financing and asset securitization as well. As part of the program, we held the activity of “Entrepreneurship, Creation and Innovation–Young Chinese Dream” in universities. The capital market is important in helping young people realize their dream of “colorful life” by supporting innovative and entrepreneurial activities under the severe situation of employment.
To be compatible with China’s status as the second largest economy, both top-down financial reforms and bottom-up explorations are in need. Given the huge size, unbalanced development and complex situations of Chinese economy, we have no mature international experience to copy. It requires us to respect the pioneering spirit of the people doing basic and foundational work, protect their reform enthusiasm, and make exploration and innovation and accumulate experience with consideration of local realities. As a supplement to top-down financial reforms, Chinahas launched pilot financial reforms in a dozen of regions, such as Shanghai, Qianhai in Shenzhen, Binhai New District in Tianjin, Chongqing, and Haixi in Fujian Province. Experience gained from such reforms has played an irreplaceable role in boosting the financial sector to serve local economy and accelerating financial reforms. Now, it is the time for us to summarize experience and overhaul the industry thoroughly. We should focus on the essence of finance with a sober mind, making sound efforts to enhance the capability of the finance sector in serving the real economy.
Since last year, several regions have been actively exploring ways to develop regional equity exchanges based on the State Council’s clean-up and standardization of various trading venues. Such exploration makes up the insufficiency of the capital market in serving local economy in a top-down approach. As an integral component of OTC markets, regional equity exchanges will help consolidate the basis of exchange markets, and draw high attention from us. To develop OTC markets, China is making up a missed lesson. Established at the very beginning as a market accessible to investors throughout the country, China’s capital market skipped over the stages of developing from a niche market to a mass market, from an OTC market to an exchange market, and from private placement to public offering. As a result, listed companies did not develop into public companies in a gradual way. Many of them did not obtain funding from OTC markets in their infancy. They did not restructure themselves and standardize their accounting practices and operation until got listed. 321 companies got listed on SZSE in 2010, and more than 70% of them completed restructuring within three years preceding the IPO. Such companies may find it difficult to adjust to the post-listing environment and thus potentially threaten the health of the market. If enterprises adopt professional services from brokers, accountants and lawyers and come under the watchful eye of sophisticated investors to improve their accounting practices and operation in their early stages, the mechanism of integrity, something that has been missing, would be established. Meanwhile, intermediaries’ participation in the OTC market will help enhance their own service quality and foster loyal clients.
Development of OTC markets will also further extend the service scope of the multi-tiered capital market to small businesses. Exchange markets have certain thresholds for enterprises to get listed. SZSE and Shanghai Stock Exchange (SSE) have a history of over 20 years, only 2500-plus companies got listed. Things are similar in well-established global markets—the US, a mature market, has only 5000-plus listed companies. Apparently, with the huge number of SMEs in China, the exchange market is not enough. In addition, it is difficult for investors on exchange markets to accept small businesses in early days of growth, especially tech SMEs, due to their small size and high risk. Small businesses can only obtain capital service from the OTC markets. Besides, as exchanges impose increasingly stringent disclosure and compliance requirements on listed companies, some enterprises find it unnecessary to adopt higher operation and disclosure standards and therefore may choose OTC markets instead.
How the multi-tiered capital market extends its service scope and well serves SMEs is a financial challenge worldwide. On the one hand, SMEs’ profitability is not stable and it is difficult to identify and prevent risk. On the other hand, it is difficult for intermediaries and market organizers to generate revenue as SMEs are less likely to be actively traded. The whole industry racks brains to solve these problems, and the launch of QEE is a good trial.
QEE is aimed at “becoming a market-oriented financing platform other than SZSE, SSE and commercial banks” and is dedicated to helping quoted companies raise funds through private equity, private placement bonds, etc. With such clearly defined positioning, I am confident that, as long as QEE strictly adheres to its status as a private equity market, limits financing and investment risk to selected investors and highlights “autonomous market and open rules” and “sellers fulfill due responsibilities while investors bear their own profits or losses”, the orderly operation of the market will then hinge on the self-governance and self-discipline of the market, which will effectively prevent spread of risk.
QEE also adopted an advanced service model—to integrates company display, training consultancy and financing, offering a service package to investors, including registration, custody, trading and settlement. It also attaches great importance to the application of Internet technology and provides non-standardized, customized services to selected investors through an Internet platform. In addition, it pays attention to interaction between investors and enterprises and has built an “online tribe” in which members can interact with each other. As a result, a comprehensive investment and financing service system targeting SMEs has been put in place.
23 years ago, SZSE came into existence in Shenzhen Special Economic Zone, a city that spearheaded China’s reform and opening up. At that time, no one had expected that SZSE would develop so fast and attain the current size. During the same time, SZSE also experienced many unexpected setbacks. As QEE started operation in Shenzhen today, I hope that all parties will carry forward the city’s tradition of “encouraging innovation and tolerating failure” and care for the new market as always. Today, Shenzhen boasts China’s most dynamic innovative SME groups with various financial intermediaries. Located in such fertile soil, QEE is capable to pave a new path, which will not only effectively prevent risks but also well serve SMEs, providing new investment channels for investors.
