This post was originally published on this site

A board shows stock prices at a securities company in Beijing. China says it is planning a new Beijing Stock Exchange.

Greg Baker/AFP via Getty Images

New details have emerged on China’s proposed Beijing Stock Exchange, which plans to host listings for innovative small and midsized companies.

President Xi Jinping first announced plans for the exchange on Thursday, but details only later were provided by China’s securities regulator.

The new bourse would be the third on the Chinese mainland, after the Shanghai and Shenzhen exchanges. Just south of the mainland border is the Hong Kong exchange, which more and more has begun taking its cues from Beijing.

Authorities did not say when the Beijing exchange would begin trading, but analysts at Goldman Sachs Group said in a note Sunday that the timetable should be shorter than the seven-month preparation period it took for the Shanghai Stock Exchange’s STAR Market in 2019.

It is also unclear if individuals will be allowed to invest in the new exchange, though experts quoted in Chinese media said it was likely.

While the Shanghai and Shenzhen exchanges, through subsidiaries, will be the main stakeholders of the Beijing Stock Exchange, the China Securities Regulatory Commission (CSRC) will oversee the coordination, rule-making, and “supporting policies to ensure the smooth launch of the reform” that will create the new exchange, according to a CSRC public notice on Thursday.

In essence, however, the Beijing exchange will be born out of an existing over-the-counter trading platform in the capital city.

In 2012, Beijing established the National Equities Exchange And Quotations (NEEQ), often simply called the New Third Board, allowing over-the-counter trading for smaller companies that fall short of listing requirements for the Shanghai and Shenzhen exchanges.

The New Third Board has three tiers, with 66 firms currently in the top category, known as the select tier. The Beijing Stock Exchange will initially subsume that tier, allowing most or all of those 66 companies to formally list on the new public exchange, according to statements by the CSRC.

Nearly 70% of the firms currently in the select tier come from the materials and industrials sectors, with smaller portions from IT and health care. The tier’s largest company by far is Btr New Energy Materials, a Shenzhen-based manufacturer of carbon and graphite products with a market cap of nearly $7 billion, according to data provider Wind. Next is Linton Technologies Group, which makes crystalline silicon processing equipment for the photovoltaic and semiconductor industries.

Firms in the second of the three tiers will need to meet special requirements for possible listing on the Beijing exchange.

The CSRC on Friday released draft regulations for the exchange, which are open for public input until Oct. 3. The draft, so far only available in Chinese, covers listing and disclosure requirements, pricing mechanisms, and governance structures.

According to the rules, the exchange will use a registration-based IPO system like those used in developed economies, which rely mainly on disclosure requirements. While the Shanghai and Shenzhen exchanges’ small tech boards also use a registration-based system, their main boards still employ an often slow and tedious approval-based listing system, which requires screening procedures as well as profitability and other requirements.

The draft rules also note that stocks on the Beijing exchange will not be allowed to rise or fall more than 30% per day, except on their opening day, when there will be no cap.

The move to establish the exchange comes as both the U.S. and China have put in place roadblocks for Chinese firms to list in New York.

The market implications of the new exchange include “limited cannibalization risks” for other exchanges in China and Hong Kong until the new bourse becomes scalable, and increased “incremental inflows to A shares” because of the exchange’s market-oriented structure, Goldman Sachs said in its note.

The former chairman of the CSRC, Xiao Gang, also touted the market-facing structure of the new bourse, saying such capital markets were particularly essential for the much-needed development of China’s trade in services.

But Xiao’s main message was simpler. “Only when small and medium-sized enterprises are good will the economy be good,” he told the official newspaper of China’s Political Consultative Conference.

Meanwhile, stocks on the over-the-counter New Third Board surged following news of the exchange plans. Nearly all shares in the select tier closed higher Monday, and every one rose Friday, resulting in a 20% overall increase since Thursday. Shares still rose Tuesday but more modestly.

All mainland markets rose as well Tuesday. The benchmark Shanghai Composite Index closed up 1.5%, hitting its highest level in nearly seven months.