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At the 2015 SSE Forum on Equity Investment in China held on May 19, Vice President Liu Shi’an of the Shanghai Stock Exchange (SSE) gave a keynote speech as to the significance, urgency and overseas experience in launching the Board of Strategic Emerging Industries. According to Liu, establishment of such a board responds to China’s “innovation-driven development strategy”, likely to meet the actual needs of emerging enterprises and facilitate development of the multi-tier capital market, as well as provide effective channels of exit for venture capitals invested in emerging enterprises and draw more social capitals toward emerging industries.
When talking about the significance of the Board of Strategic Emerging Industries that day, Liu pointed out that the founding and the growth of emerging enterprises have to rely on the financial system and the capital market. However, the current market system and issuance system in China’s capital market are mainly targeted at the characteristics of traditional enterprises, without systems specially arranged for emerging enterprises so that it’s hard for them to enter the capital market. There’re still a lot of strategic emerging enterprises that can hardly win financing support due to inconformity with current conditions for issuance and listing in the domestic capital market, as they haven’t profited so far. Establishment of the board can provide such enterprises with a platform in domestic capital market to support their business development.
From the perspective of developing the multi-tier capital market, Liu believed the current main board, SME board and growth enterprise board feature on the whole identical types of enterprises without fully showing the differences between different market boards. Listed emerging enterprises, which are in a small amount, achieved weak aggregation effect and limited financing capacity, thus hardly exerting the function of the national strategy having the capital market support growth of emerging industries. Independent establishment of the Board of Strategic Emerging Industries will be conducive to forming industrial concentration and market focus, like setting up a “flagship store” for emerging enterprises; it’ll be favorable for attracting more social capitals into emerging industries to boost enterprises’ innovations and growth and for assuming the National Venture Capital Guiding Fund for Emerging Industries to meet the financing demands of emerging enterprises at different life cycle stages; and it will aid the multi-tier capital market to exert its function of supporting enterprises’ independent innovation, hence providing great power for innovation-driven transformation of China’s economy.
From the perspective of equity investment, the Board of Strategic Emerging Industries can help develop more channels for the exit of private equity (PE) and venture capital (VC). Liu claimed that from founding to maturity, an enterprise will need funds of different risk appetites to support its development, so that whether different kinds of funds can smoothly flow between different stages of enterprise development has become a key to the success of an enterprise. PE/VC is an important capital source at the early stage of emerging enterprise development, and as the secondary market is an important channel of PE/VC exit, the level of its completeness and the exiting efficiency will be the chief factors that will directly impact VC input in emerging industries.
However, according to the current development of domestic capital market, the secondary market can hardly meet the demands of VC’s exit. Statistics show that from 2006 to 2014, there’re altogether 19,162 projects involving the investment of PE/VC, but only 3,624 saw such investment exited, with the gap expanding between the number of investment projects in inventory and that of those with PE/VC exited, not to mention only less than 7% companies listed with IPO witnessed such an exit annually on average. In view of all these, Liu believed the establishment of the new board will guarantee VC engaged in emerging enterprises effective channel of exit, thereby absorbing more capitals into emerging industries to drive transformation and upgrading of China’s economy.
Liu also emphasized the urgency of establishing the board. For instance, some high-quality China concept stocks and Chinese enterprises that planned to get listed abroad are seeking ways of getting listed earlier in the A-share market. By contrast, a complete system is absent from the domestic capital market to take over China concept stocks, which further intensifies the urgency of establishing the Board of Strategic Emerging Industries. Thus, in the context of the reform of the registration system of stock issuance, the SSE’s promotion of the board will play an important role in taking over China concept stocks. But so far, there’re still some institutional obstacles to the listing of China concept stocks in A-share market, so promotion of the new board, plus setting-up of other innovative systems, is hoped to facilitate the listing. As a brand new independent board, the Board of Strategic Emerging Industries will serve as a pilot zone operating in the principle of market orientation.
In addition, the multi-level exchanges abroad enlighten the SSE to establish the Board of Strategic Emerging Industries beyond the current boards in the market. Liu briefed the SSE’s findings after systematic studies: a multi-level market is based on differentiated conditions for listing; it is better that different boards use a uniform trading mechanism; for an emerging market, strict regulation over information disclosure is a guarantee for the success of low-level markets; flexible board switching mechanism and strict delisting system are chief measures to ensure efficient operation of the market.
In the end Liu summed up, “There’s no standard model to follow when exchanges abroad set up a new board, but a key factor for the board’s success is a system matching the board’s orientation, including flexible listing standards, moderate investor suitability management, a rigorous, lasting regulatory system, and a strict delisting system, which shall be used for reference in our building of the new board.”
