China launched the new Beijing Stock Exchange to fund small businesses—but it may also ‘cannibalize’ existing bourses

November 15, 2021, 10:40 AM UTC

China’s new Beijing Stock Exchange (BSE) officially opened for business on Monday in a bid to shore up support for homegrown small to medium-size enterprises (SMEs) during a time of slowing economic growth.

Two months ago, Chinese President Xi Jinping announced the country’s new bourse as the “primary platform” that will serve “innovation-oriented SMEs” by offering them a new, accessible fundraising pathway.

China’s economic planners view SMEs as the backbone of the economy since small firms employ the majority of the country’s population and are integral players in China’s tech sector.

Eighty-one companies began trading on the Beijing bourse Monday, primarily from the high-end manufacturing and software sectors. Ten firms, like tech upstart Keda Automation Control—a Shanxi-based company that manufactures mining robots and other equipment—made their first-ever public debuts on Monday, while the other 71 firms transferred their listings from the National Equities Exchange and Quotations (NEEQ), China’s over-the-counter (OTC) exchange, to the BSE.

The 10 newly public firms all gained in their first day of trading and notched the largest price jumps. Henan Tongxin Transmission, an automobile transmission maker, surged the most—recording a 504% increase in morning trade, Reuters reports, citing Orient Securities data. The other 71 firms that shifted their listings to the BSE didn’t fare as well; some, like battery maker Huizhou Huiderui Lithium Battery Technology, saw their shares jump 17%, while others recorded double-digit price declines. Fifty-nine of the 71 recorded losses on Monday.

Over 4 million investors have now signed up to trade on the BSE.

China doesn’t need a new exchange, even if the BSE improves on some of the NEEQ’s weaknesses, argues Thomas Gatley, China corporate analyst at Beijing-based research firm Gavekal. The new board may “cannibalize” listings from the NEEQ and Shenzhen’s ChiNext; with those firms likely to list in Beijing the same ones that “would’ve listed elsewhere in the absence of the BSE,” he says.

The BSE likely won’t generate a “material amount of additional fundraising…[and] attract the same sort of investors who currently day trade on small Shenzhen names,” says Gatley.

At least 200 NEEQ-listed firms are now preparing to apply for the exchange’s highest tier (known as the “select tier,” in which a company has to meet certain profitability and innovation requirements)—which is the first step in qualifying to list in Beijing. The BSE will allow only companies that have been on the NEEQ’s “select tier” for 12 consecutive months, alongside other financial requirements, to list.

Still, small mainland firms have typically faced challenges in capital raising. Banks “tend to focus their lending on larger state-owned enterprises and corporates,” says Michael Wu, senior equity analyst at Morningstar. The Beijing bourse is a key part of the government’s continued effort to develop China’s capital markets, one that will make listings easier for SMEs, says Wu.

China has already launched two exchanges that cater to smaller, early-stage firms—Shanghai’s STAR Market and Shenzhen’s ChiNext—but the BSE will ferry firms to the capital markets faster than its predecessors, says Bruce Pang, head of macro and strategy research at China Renaissance Securities. Beijing Stock Exchange IPO hopefuls won’t need to clear profit and revenue thresholds to list, and will instead be allowed to meet less stringent financial requirements, like staying above a minimum market capitalization of roughly $31 million.


The Beijing Stock Exchange isn’t an entirely new initiative. It’s a revamped and highly specialized version of the NEEQ. The government launched the NEEQ in 2012, a stepping-stone for smaller companies and startups that needed funding before listing on China’s main boards, the Shenzhen Stock Exchange and the Shanghai Stock Exchange.

The NEEQ never fulfilled that mission, though. As an OTC exchange—where trading is done directly between two parties, rather than via a supervised, centralized exchange like the New York Stock Exchange—the NEEQ had less stringent reporting standards, lower barriers to entry, and its stocks were traded infrequently. The bourse attracted lower-quality firms. In 2015, operators of the board found that 10 listed companies had violated the exchange’s rules by filing incomplete or false disclosures. Few companies managed to make the move to larger exchanges. In 2017, over 216 firms delisted from NEEQ, either voluntarily or forcibly owing to the bourse operators, after the board tightened its listing requirements to improve the quality of its listed companies.

As of this September, the NEEQ recorded a market cap of roughly $309 billion, compared with ChiNext’s $1 trillion. The NEEQ still hosts over 7,000 firms.

The NEEQ’s listing requirements ultimately were too lax, attracting poor-quality firms and turning off investors. Beijing set up the BSE to improve on its failed NEEQ project—and as a complement to the STAR and ChiNext, which have more stringent listing requirements than the BSE.

At the same time, China is revving up its capital market reform and development to open up new channels of investment for Chinese savings. Beijing is introducing the new exchange to “recycle the savings away” from China’s embattled property sector, wrote Jefferies analysts Sean Darby and Kenneth Chan in a Nov. 15 note.

Beijing seems to have learned from its past mistakes, despite the NEEQ’s past hiccups.

China’s securities regulator released a set of comprehensive rules governing the new Beijing bourse on Oct. 30. IPO hopefuls will need to disclose “higher-quality information,” like three years of annual reports, to be eligible to apply for listings. The listing rules also allow for “greater trading swings of up to 30% in either direction,” compared with STAR’s and ChiNext’s 20% cap, increasing the bourse’s attractiveness to investors, says Brock Silvers, managing director at Shanghai-based private equity firm Kaiyuan Capital.

Yet if the BSE becomes a market for “smaller, profit-challenged companies facing larger daily price swings…investor enthusiasm could be short-lived,” notes Silvers.

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