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Beijing Stock Exchange: Another Experient in China’s Counterpart to Nasdaq

2021.09.14 XIE, Qing (Natasha)、 XIAO, Xian、LUO, Danchen

On September 2, 2021, Chinese President Xi Jinping announced the establishment of the Beijing Stock Exchange (BSE) . Shortly after the announcement, the BSE completed the business registration, whilst the China Securities Regulatory Commission (CSRC) released, for public comment, a set of consultation papers on the administrative rules and relevant business rules for the BSE. The National Equities Exchange and Quotations (NEEQ, commonly known as the “New Third Board”) was initially launched to be “China’s counterpart to NASDAQ” in the process of establishing a multi-level capital market regime. Now, the BSE will be built based on and structured to be an upgraded version of the New Third Board, which we believe will have the potential to eventually grow into a bourse as large as the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE).

1.    Strategic Positioning

The establishment of the BSE is regarded as an effort to support the development of small and medium-sized enterprises (SMEs) that are specialized, refined, distinctive and novel.[1] The BSE will basically function to serve the SMEs, particularly those innovation-centered SMEs, which has been reflected in the rule-making and internal-structure designing process for the BSE. Specifically:

(1)   Pilot the registration-based IPO system, which will align with that of the STAR Board and ChiNext in general, with lowered thresholds for issuance and listing of securities compared with that of the STAR Board and ChiNext.

(2)   Shift the systems and rules of the selection layer of the NEEQ. Existing companies traded on the selection layer of the NEEQ will all be shifted on the BSE, afterwards, companies that have traded on the innovation layer of the NEEQ for 12 months or more will be newly listed on the BSE.

(3)   Form a multiple-level market structure of the “NEEQ basic layer, NEEQ innovation layer, and the BSE”, which is expected to provide tailored services for SMEs at different stages and types to satisfy various financing needs, with the BSE for listed companies and the NEEQ basic/innovation layers for non-listing public companies.

2.    Relationship between the BSE and SSE/SZSE

The new bourse will be positioned differently from the existing Shanghai and Shenzhen markets while still adhering to interconnection with these markets, the regulators said in a press conference. For example, stocks on the BSE are allowed to be shifted to the SSE/SZSE subject to certain conditions. We believe that the BSE may have the following advantages in competing with SSE and SZSE:

(1)   The innovation and basic layers of the NEEQ are expected to steadily supply numbers of promising companies to the BSE.[2]

(2)   The BSE is intended to construct a multi-level market structure with more flexible listing/delisting rules, which will satisfy the needs of circulation and re-listing of delisted shares. Specifically, delisting stocks on the BSE are encouraged to be shifted on the innovation layer or basic layer of NEEQ if they meet the prescribed conditions, otherwise they will directly apply the delisting procedures. Nevertheless, stocks delisted from the BSE still have opportunity to be re-listed thereon.

3.    Investor Suitability

Currently, the New Third Board has been implementing an investor suitability management system, with different thresholds for investors of the selection layer, innovation layer, and basic layer, under which only qualified investors can trade in the New Third Board.[3] The BSE will launch and implement the same investor suitability management system as that of the New Third Board, the CSRC said in an official statement. As poor market liquidity is still a headache facing the New Third Board, we would not exclude the possibility that the BSE might lower the threshold for investors based on the actual needs.

4.    Re-financing System

According to the consultation paper released by the CSRC, the BSE will adopt a similar re-financing system to that of the STAR Board and the Main Board. Specifically:

(1)   Issuers may launch either public offering to non-specific qualified investors (the “Public Offering”) or private offering to specific qualified investors (the “Private Offering”), with the availability of ordinary shares, preferred shares, and convertible bonds.

(2)   In a public offering, the issuer may either directly determine the issuance price through consultation with the lead underwriter or determine the issuance price and issuance targets through online bidding or offline bidding of qualified investors. The issuance price shall not be lower than the average trading price of the company's shares for 20 trading days or one trading day prior to the announcement date of the prospectus. Moreover, issuers may allot shares to strategic investors in a public offering.

(3)   In a private offering, issuers may offer securities to their controlling shareholder, de facto controller, and strategic investors on a fixed-price basis (the “Fixed-Price Issuance”), while offering securities to other investors through a bidding method (the “Bidding-Based Issuance”). The issuance price shall not be lower than 80% of the average trading price of the company’s shares for 20 trading days prior to the benchmark date. Additionally, the lock-up period for a fixed-price issuance shall be 12 months, while that of a bidding-based issuance shall be 6 months.

5.    Trading System

The trading system of the BSE will keep in line with that of the NEEQ selection layer in general. Specifically

(1)   The trading methods for stocks include auction trading, block trading, and transfer of shares by agreement, etc.. Detail rules for transfer of shares by agreement will be otherwise stipulated by the BSE.

(2)   Except for the first trading day after the listing of new stocks (excluding secondary public offering), a ± 30% daily trading price limit is set for stock trading on the BSE.

(3)   Market-making mechanism can be introduced in auction trading with prior approval of the CSRC.

(4)   The BSE will put close monitor on abnormal trading activities such as ramping/dumping, spoofing, and wash trades.

6.    Foreign Investor

Currently, no special rules have come out for foreign investors’ participation in the BSE. It is expected that the rules for foreign investors’ trading on the BSE will be consistent with the relevant NEEQ rules, as well as relevant rules in the Shanghai and Shenzhen market, specifically, the rules for shareholding limits such as “the proportion of shares held by a single QFI or other foreign investor in a single listed company shall ≤ 10%” and “the aggregated shareholding proportion by all QFIs and other foreign investors in a single listed company shall ≤ 30%” will still be applicable.

7.    Regulatory System

Companies and other participants in the BSE will be subject to administrative regulation of the CSRC, self-disciplinary supervision of the BSE, and self-disciplinary supervision of the Securities Association of China (SAC). Thus, securities violations arising in the issuance and trading process in the BSE may be punished by the aforesaid three regulatory authorities simultaneously or respectively, depending on the circumstances of each case.

Our Observations

In short, the BSE’s establishment is one of the most significant developments in the Chinese capital market in the context of China's efforts to raise the development of SMEs to a national strategic level. The philosophy of the Chinese capital market is observably different from that of overseas markets. And compared with the rules and regulations of overseas developed markets, the systems of the Chinese capital market are still being refined. The development of the Chinese capital market is driven by economic growth-oriented guidance and the goal of serving the real economy. In addition to the BSE, the Chinese regulators approved the Guangzhou Futures Exchange in early April of this year and have been promoting a series of reforms for the capital market. We await further efforts in improving, rectifying, and promoting the capital market of China.

We will continue to monitor the situation and keep our clients apprised of any important developments.

[1] Please refer to the CSRC press conference on September 3, 2021, available at: http://www.csrc.gov.cn/pub/newsite/zjhxwfb/xwdd/.

[2] By the end of September 6, 2021, a total of 7,299 companies were listed on the NEEQ – among which 66 on the selection layer, 1,250 on the innovation layer, and 5,983 on the basic layer, data from the NEEQ website revealed; while the total number of listed companies in the SSE and SZSE was about 4,550.

[3] Please refer to the NEEQ Administrative Measures for the Investor Suitability, and the NEEQ Business Guidelines on the Management of Investor Suitability.

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