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SONG Liping, President of the Shenzhen Stock Exchange (SZSE) was invited to an interview by the Xinhuanet on 2nd April 2009. SONG Liping had a two-hour discussion with netizens and answered questions on supervision of the new market, relationship between the SME Board and the new market and other related topics.
The China Securities Regulatory Commission promulgated the provisional rules on IPO and Listing on the new market, which is to be effective as of 1st May 2009.
1. Question: What’s the significance to launch the new market given the current economic situation?
Answer: Thank you for your attention on the venture board. Under the current circumstance, the board is of great significance for ensuring economic growth, adjusting economic structure and enhancing job creation.
Firstly, the board is conducive to stimulating private investment and therefore boosting economic growth. As we know that the small and medium businesses play a crucial role in the nation’s economic development. The venture board not only provides leading venture firms with support in direct financing, but also activates private investment including venture capital and private equity. Secondly, the board supports development of new business models and helps adjust, optimize and upgrade of the industrial structure. Thirdly, the board can help create more jobs by promoting venture start-ups. As we all know, SMEs contribute significantly to job creation, supplying 75% of the nation’s employment. The venture culture will be crucial for releasing the dynamic creative powers of society.
2.Question: Is the board able to provide more financing opportunities for businesses currently under the shadow of the financial crisis?
Answer: The board can help solve financing problems for small and medium-sized enterprises (SMEs), which became exacerbated under the current circumstances. Relevant institutions including the central government are working hard to provide all-around financial support to them.
Our analysis shows that the financing difficulty for SMEs also stems from their intrinsic characteristics. For example, SMEs tend to feature less operational stability, under-developed credit lines and limited collateral assets. It is difficult to solve the bottleneck problems at root through bank loans or guarantees. Therefore it is up to the multi-tier capital market to provide SMEs with stable, long-term equity financing.
At the same time the capital market has a leverage power. Once the SME is admitted into the capital market, it gains access to a financial support system integrated through the capital market.
3.Question: Do you think it is the best time to launch the board?
Answer: I think the question involves two issues. First is it the best time to launch the board under the special circumstances and second will it impact the market? Actually, in view of worldwide development of venture markets, it is difficult find the optimal launch opportunity.
However current market conditions indicate a proper opportunity to unveil the venture board. First violent fluctuations last year have made investors more mature and rational. The risk of wild speculation is much lower. Second thanks to years of intense preparation and design effort, the venture board’s rules, regulations and risk-prevention measures have been much improved and more sophisticated. And the three decades of reform and development have produced a large number of high-quality, high-growth companies. Therefore I think time is ripe for the launch.
The venture board will not impact the market. A few days ago, Vice Chairman Yao made this point clear during a press interview. What characterizes the venture board is the small scale and offering size on listing candidates. As Vice Chairman Yao said, even if 100 were to offer shares on the venture board in a year, the total fund raised would be just around 10 billion yuan, less than a single large blue-chip IPO. At present, the A-share market capitalization is valued at 16 trillion yuan and daily turnover at 100 billion yuan. Thus in terms of liquidity, the venture board will not impact the main board. And the experience of the SME board also testified to this point. In June 2004 when the SME board was launched, the market was also depressed. However the launch did not bring serious impact on the market. Instead, it brought in fresh liquidity. As a result, the market became active again. Therefore I don’t think the launch of the venture board will impact the main board.
4.Question: What can we learn from the overseas growth enterprise markets to help with smooth development in our venture board?
Answer: Nasdaq is universally acknowledged as a market characterized by venture enterprises. However it was not called a growth-enterprise market. In fact it was an electronic trading platform. But it became a successful market for venture enterprises. Thus the SEC approved its status as a national exchange.
German Neuer Market failed during the technology stock bubbles at turn of the century. The failure can be attributed to its over concentration on the IT industry, compromising its power to resist risk. When the IT industry declined, the market had no choice but to close down.
Globally, there have been 47 venture enterprise marketsl. They are mostly successful despite a few failure cased. Many of them were created around 2004. AIM and Kosdaq are among the most successful. In recapturing their experience and lessons learned, we realize the importance of institutional design in warding off risk. For example, German Neuer Market’s industrial coverage was too narrow. Thus in the Chinese venture board, we must broaden coverage. Furthermore the venture board must attract high-quality listing candidates. We have fully understood these issues in our institutional design.
In term of industrial coverage, we must realize that the enormity of Chinese domestic market. Since 2005, the Shenzhen Stock Exchange launched a nationwide SME-fostering program, which revealed to us the plenitude of listing resources. Thus a broad industrial coverage in the new venture board is fully justified.
And we must not set reasonable standards of admission. In some overseas markets, especially those established around 2000, profitability is not required and only 24 months of operational history qualifies for listing. Our rules are stricter and require reasonable thresholds.
In some overseas markets, regulation is overly flexible. In comparison, we exercise stricter regulation over the de facto controllers, corporate governance and information disclosure. For example, actions will be taken against misappropriation IPO proceeds to projects other than those disclosed in prospectus. These measures not only conform to the natural course of development for venture firms but also the practice of corporate governance in the present stage.
5.Question: China launched the venture board during the financial crisis, indicating its strong confidence in long-term development. Does the board help with measures in response to the crisis?
Answer: I think it helps. China was affected by the financial crisis, and it is of crucial significance to launch the board at this time. In particular the venture board actually lends SMEs a helping hand in time of trouble, instead of adding icings on the cake.
Globally speaking, in 1970s, when the oil crisis triggered recession in traditional sectors and slowed the world economy, Nasdaq came into being in the US. With its customization for venture companies, it catalyzed the formation of the Silicon Value and powered a new round of economic growth.
After the Asian financial crisis, Korea launched Kosdaq, which stimulated venture enterprises in the technology sector. It also helped regain investor confidence in Korea.
Taiwan Province initiated the policy of Technology Island after economic bubbles bust in 1994-1995. Taiwan’s venture board also stimulated unprecedented development in its technology sector and boosted industrial upgrade and economic recovery.
Therefore, as the premier said, confidence is more important than gold. At this point, the financial crisis is not yet over. Global economy will remain in the doldrums in quite a long time to come. The launch of the venture board will be a strong support for efforts to fight the financial crisis and promote economic recovery in China and worldwide.
6.Question: what is the position of the venture board in the multi-tier capital market?
Answer: The multi-tier capital market refers to the main board, SME board, the new market and OTC market. Actually SMEs board is a part of the main board. It has the same offering requirements as the main board.
The new market is more applicable for start-up businesses, as it requires enterprise to be profitable for only two consecutive years instead of three years on the mai board. With other conditions, the venture board is open to companies with only one-year profitability. The venture board’s functional positioning, risk profile and institutional designs are also different from the main board.
7.Question: what kind of experience does the SMEs board feed to the new market?
Answer: The SME Board opened in May 2007, and it has 273 listed companies, which have witnessed rapid development since listing. Some companies, however, have seen unusual growth, such as Suning Electronics. The company’s scale, speed of growth and quality would not be possible, had it not entered the capital market.
We can learn a lot from its development. Firstly we had a deeper understanding about the urgency and necessity to support SMEs through the capital market. Our research shows that development in the capital market lags behind SMEs’ financing need. Especially leading SMEs in their niche markets are in an urgent need for a financing mechanism to power their speedy growth. Some software firms may not lack funding, but they need capital incentives to attract and keep talent. The capital market can provide both financing and an incentive mechanism.
Secondly training for listing candidates will be deepened and advanced. A lot of effort is devoted in this regard. We have provided training to over 5000 companies, thanks to support of local governments and intermediaries.
Thirdly, the four years of operation have confirmed the importance of strict regulation. As most SMEs are private businesses that went through complex situations during growth and many are family businesses, we find them often struggling with internal control and corporate governance. For example, some SMEs do not even distinguish between corporate funds between family assets but there is too much discretion in using corporate funds.
In response to this situation, we initiated the specialized management mechanism for IPO proceeds account. Sponsoring institutions are made responsible for firsthand regulation over appropriation of the proceeds. We also exercise strong regulation over the practice of major shareholder embezzling corporate resources. Strong regulatory actions will be triggered whenever signs of such practices are identified.
In 2007, when the secondary stock market was bullish, we prohibited listed companies from trading shares. Some did not understand such regulation, arguing that the regulation may cause them to lose an opportunity to expand corporate wealth. However when the market later fell in deep adjustment, they became thankful for the regulation
8. Question:How is the SZSE’S preparation going on? And what is to be prepared next?
Answer: The SZSE has been preparing for the board since 2000. And since 2007, under the leadership and guidance of the China Securities Regulatory Commission, the SZSE established preparation department for the board and further analyzed patterns of development and experience of overseas market. We have also made thorough research on the conditions of domestic venture companies including their stage of development, the support they need and their risk profile.
The next step is to optimize what have been prepared. Relevant rules and regulations are to be released, training for investors, intermediaries and other involved institutions are to be deepened, fostering of listing sources to be continued and technology system to be optimized.
9. Question: As the promulgated IPO rule mentioned, the venture board should establish investor accession system, which should be compatible for investor’s risk-tolerance and fully disclose investment risk. Why should such a system be established?
Answer: Design and requirement of investor accession were set according to characteristics of the venture board as it has totally different risk and profit features from the main board. The venture board enjoys comparatively lower standard for IPO, which also means it is more risky. As the Chinese stock market is characterized by a large number of private investors as the mainstay of investing population, a threshold for admission is necessary. Investors are required to have certain risk-discerning ability and risk tolerance. Otherwise the investor may suffer unnecessary losses and intensify risk on the venture board.
10. Question: Are private investors allowed to participate in the board?
Answer: The threshold for private investors has not been decided yet. However there are many channels for investors to invest in the board. For an example, mutual funds set no threshold for private investors.
11.Question: What are the main risks of the new market that an investor should pay attention to?
Answer: firstly operational risks. Venture enterprises are less stable than main board companies in terms of operation.
Secondly, credit risk. Information asymmetry may be more acute than the main board.
Thirdly, sharp fluctuation of stock prices. As venture companies often feature small scale and equity size. Unstable operational performance may cause sharp fluctuation in stock prices.
Fourth, technology risk. Venture companies tend to have more technology risk as its technology has yet to reach maturity.
Fifth, risks from unsophisticated investing public.
Sixth, risks resulting from substandard services of intermediaries. We require intermediaries to offer their best effort and due diligence in their service. However some intermediaries may compromise on their ethical responsibilities, providing misleading financing statements, audit reports or legal opinions. In this regard, it is a challenge for sponsoring institutions to bring a truly qualified listing candidate to market. Thus intermediary risks are not negligible.
12. Question: What will the new market do in respect of investor training?
Answer: The Shenzhen Stock Exchange conducts the investor training in all aspects. The priority is to set up a core author group for investor training on the new market. First of all, we must understand what investors are interested in and what subsequent questions will emerge. We must be able to offer clear and to-the-point answers in a proactive manner. Therefore we will recruit experts from fund management companies, securities firms, venture capital firms and leading universities to write or lecture on rules of the new market, overseas venture markets, in order to improve professionalism and readability.
Secondly we will fully utilize communication channels such as the Internet, newspaper, TV, broadcast, books and hold a variety of events like knowledge contest, online dialogues, open house and onsite activities.
Thirdly, investor training will be timely and effective, easily accessible and understandable for investors in both content and means of delivery.
Fourth, training sessions on laws and regulations, business processes and risk control will be given to senior management and leaders of brokerage outlets in an effort to promote their service quality and capability. These training sessions will take the form of national tours.
Fifth we will launch national lecture tours of investor education. We plans to jointly hold professional and targeted investor training campaign in collaboration with branches of securities firms nationwide.
13. Question: How to prevent speculation during the first-day trading on the venture board?
Answer: First of all, let me explain the reason for heavy speculation on the first day of trading. As venture companies have relatively small share capital and small size of issuance, there is discrepancy between supply and demand.
Second, there is also discrepancy between offering price and trading price on the secondary market. From the exchange’s point of view, we must institutionalize measures against speculation. In fact we have already taken such measures on the SME board. When the stock price rises unusually high, the stock will be suspended from trading for 30 minutes to give traders an opportunity to cool off and decide whether such a high price is justifiable. At the same time, we will impose real-time monitoring on irregular quotations, especially frequent placing and cancellation of orders.
At the same time, market-oriented offering will be adopted. The China Securities Regulatory Commission is researching on reform on the new share offering system. On this basis, we will take further measures to prevent heavy speculation, especially at the very first day.
14. Question: How to enhance market supervision of the new market to prevent irregularities like market manipulation?
Answer: In terms of share price manipulation, we will raise the transparency. The pre-open mock trading will guide the investor in placing reasonable orders. And during the trading session, specialized staff will watch for price fluctuations and stay in direct communication and interaction with relevant listed companies. Once irregular price fluctuations are detected, listing disclosure department will be informed immediately to determine if the listed company in question has unfulfilled information disclosure responsibility.
We will also analyze the sources of orders that cause the unusual fluctuations and take appropriate actions. We have a real-time market surveillance system, listing disclosure department and membership department, which work in concert to engage in real-time all-around monitoring. If we detect signs of market manipulation, we will contain the practice and dissolve the emerging risk.
We will also analyze the source of orders that leads to the unusual movement of the share price and take corresponding measures.
15. Question: How to enhance the operational conformance and regulation of information disclosure for companies listed on the new market?
Answer: Firstly, corporate governance should be strengthened, including the responsibility of controlling shareholders and de facto controllers, enhancing the independence of independent director and the function of the audit committee.
Secondly, more timely information disclosure is required. The Internet will be utilized for real-time disclosure of information.
Thirdly, the disclosure criteria for provisional reports will be moderately adjusted in accordance with the characteristics of venture enterprises.
Fourthly, risk explanation will be more detailed, clarifying any question as it emerges in a timely manner.
Lastly, funds raised by listed companies must be used fairly
16.Question: How does the new market give full play to sponsoring institutions?
Answer: The sponsoring period will be prolonged. In this way, the sponsors’ responsibility of will be increased. In so doing, we will improve sponsoring quality at source. In this process we will strengthen sponsor’s continued guidance and counsel to listed company. The sponsor must conduct regular onsite inspection on the listed company as part of fulfillment its duty.
17. Question: What’s the delisting system of the new market?
Answer: The IPO rules for the new market require a delisting system compatible to the characteristics of the new market. The Shenzhen Stock Exchange plans to construct a multiple-criteria delisting standard including financial status, operational capability, business performance, distribution of equity ownership, assets scale, market liquidity, operational conformance and fulfillment of information disclosure.
18. Question: What’s your consideration on the board transfer mechanism of the new market?
Answer: Voluntary board transfer will be adopted for those eligible. We respect the listed company’s choice. However, we must realize that one of the reasons for failure in overseas venture markets is premature transfer. Some high-quality companies left before the venture board grew into a sustainable size. Thus these overseas venture boards lost momentum for future growth.. Therefore, we will take these issues into consideration and aim for sustainable development of the new market.
