China Set up Capital Raising Venue for SME

SHANGHAI -- Stock prices in China are tumbling and companies are delaying initial public offerings of stock. Yet government officials said the timing is right to establish a market that will give small companies more opportunity to sell stock and raise cash. The listing venue will help channel financing into start-up and other early stage companies. It will be run by the Shenzhen Stock Exchange, whose president has dubbed it "a Nasdaq-like growth enterprise market," or GEM. Officials say details of the market will be released soon, with the first IPOs to follow as early as May. Premier Wen Jiabao gave the effort a boost this month when he included starting a GEM in his list of the government's economic aims for the year in his address to the National People's Congress, the nation's Legislature. China's new listing venue will carry symbolic weight: underscoring an embrace by the Communist Party of the five million registered, privately owned businesses in China. Small businesses in China remain hobbled by a financial system dominated by big banks with deep ties to state-owned business and little appetite for providing start-up capital. Historically, stock markets dedicated to small companies such as the U.S. "pink sheets," London's Alternative Investment Market, Hong Kong's Growth Enterprise Market and Tokyo Stock Exchange's Mothers market have been prone to abuses, ranging from companies with accounting problems to stock scams and insider trading, as well as thin trading in some stocks. In China, poor accounting, insider trading and corporate theft plague the country's more established stock markets, namely the Shanghai Stock Exchange and its smaller counterpart in Shenzhen. Shenzhen's GEM seems likely to emerge as the most speculative corner of the Chinese market Still, letting China's investors gamble is part of the strategy. The GEM is aimed at investors with a stomach for the kind of high-risk and high-reward strategy typical of venture capitalists, who seed multiple enterprises with money in the hope a Microsoft or Google might emerge. One regulator involved in GEM planning said the market will be considered a success if just one of 200 new listings becomes a blockbuster company. Foreign investors will have limited ability to trade in the new market. Still, it will offer more scope for early stage investors -- including foreign ones -- to take their Chinese companies public locally. That isn't easy now, as politics tends to favor large companies from among the estimated 20,000 businesses hoping to join the 1,600 companies that already have gone public on the Shanghai and Shenzhen exchanges since 1990. The GEM idea was proposed eight years ago. Its coming to fruition now reflects a belief among policy makers that their overhauls of the structure and operations of China's stock market since 2005 have gained investor confidence, as seen in China's exchanges recently hosting some of the world's biggest IPOs. The Shenzhen Stock Exchange has been quietly carving out a role as the venue of choice for lesser-known companies, and they often outperformed. Since 2004, when the Shenzhen market first lowered thresholds to attract small- and medium-size enterprises, more than 200 of such companies have gone public on what is called the SME section. They now boast a combined market value of about $150 billion.