A tale of three cities

London first got a stock exchange in 1698 but Beijing had to wait until 1918 for a bourse of its own. The Peking Securities Exchange was the first Chinese-owned stock market, with the slightly older Shanghai exchange set up a few years earlier (in 1891) by foreign investors.

It made its debut during a chaotic era of battling warlords and competing currencies. The bourse dealt primarily in different kinds of government debt or fiat currencies issued by the series of military regimes (known colloquially as the “Beiyang government”) that had taken control of the Chinese capital.

The exchange halted operations following the outbreak of the second Sino-Japanese War in 1937. Trading resumed for a year when the Communist Party of China (CPC) took control of the country in 1949, before profit-making companies were eliminated, putting an end to the bourse completely.

This month, however, Chinese investors have been buzzing about a new stock exchange in the capital. It looks likely to enjoy better fortunes than its predecessor, helped by backing from the heart of the Chinese government. In fact, the talk is that the new bourse is going to be a gamechanger for China’s financial markets in general.

What’s the plan and who is backing it?

There wasn’t much forewarning of last week’s announcement. Policy blueprints such as the 14th Five-Year Plan hadn’t mentioned the idea of a new bourse to complement the existing Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE). So it was a surprise when Chinese leader Xi Jinping personally made the announcement on September 2, during an address to a trade fair in Beijing.

Xi said that his administration would be reforming the over-the-counter bourse currently based in the Chinese capital, (the New Third Board: for more on this exchange, known by the acronym the NEEQ, see WiC289). The changes would herald the launch of the new Beijing Stock Exchange (BSE) as the primary platform for “innovation-oriented SMEs [small and medium-sized enterprises]”, he added.

While Xi did not offer further details, the China Securities Regulatory Commission (CSRC) then published a statement saying it would be consulting industry participants in an effort to formulate regulations for the BSE.

Early signs are pointing to strong support from the central authorities. In a speech at the annual meeting of the World Federation of Exchanges, the CSRC’s chairman Yi Huiman said that regulators were committed to a comprehensive market infrastructure that serves SMEs better. Liu He, the vice premier, has also voiced his support for the BSE. Widely considered as the key economic advisor to Xi, Liu heads the State Council’s leading group on SME development. Despite the recent crackdowns on sectors spanning the leading internet platforms, the edtech providers and the entertainment industry, Liu told another conference last week that the government would continue to offer strong support to the private sector including SMEs.

There is no timetable for when the first batch of firms will be ready for their trading debuts. But events seem to be moving quickly. On September 5, the NEEQ published a set of listing rules for the new bourse, designed for public consultation and feedback. Xinhua reported this week that the BSE had been registered as a limited company too.

How is the Beijing bourse going to be different to the ones in Shanghai and Shenzhen?

According to the proposed rules, there won’t be any limits on the changes in price that can happen when newly listed firms make their trading debuts (by contrast first-day fluctuations are capped at 44% for IPOs in both Shanghai and Shenzhen) However, there will be some restrictions on excessive volatility: trading will be suspended for 10 minutes when a stock surges more than 30% over its IPO price or drops more than 60%. Daily price changes will be restricted to within a 30% range after the first day of trading in Beijing too.

Both the SSE and the SZSE operate as not-for-profit institutions for their members (such as the local brokerages and banks). However, Caixin Weekly says that the BSE has been set up as a joint-stock corporation, akin to most of its global peers. The sole shareholder is currently the NEEQ, which itself has the other domestic bourses as its shareholders (the SSE and SZSE respectively own 20% stakes).

More importantly, the new bourse will take on a different role from the exchanges in Shanghai and Shenzhen, says the People’s Daily, with a focus on sourcing financing for SMEs.

Companies that reach their fuller potential on the BSE can then opt for listings on other Chinese bourses, the newspaper said.

Liu Jipeng, a finance professor at the China University of Political Science and Law – and a previous petitioner to the central government to upgrade the NEEQ into a more formal stock exchange – told Caijing magazine that the BSE will complement its counterparts in Shanghai and Shenzhen.

“In the past the NEEQ was being positioned as ‘the primary school’ of the Chinese capital markets and its graduates could move up a step to a bigger bourse in Shanghai or Shenzhen,” he explained. “But there is also a view that the BSE can become China’s Nasdaq.”

The mention of Nasdaq is hardly unprecedented. Shanghai’s STAR Market – a section of the board dedicated to science and technology companies – was launched two years ago with similar references. Long before that Shenzhen was championing its own junior board, the ChiNext, in a similar fashion (see WiC84).

But as with the Nasdaq’s origins, the NEEQ is an over-the-counter marketplace. Participants on the NEEQ are able to trade stocks, currencies and other instruments directly. As of this month, it was home to 7,304 listed firms with a market capitalisation of close to Rmb2 trillion ($309.44 billion). In reforms carried out last year, it introduced a three-strata system to help investors identify the firms with the best growth prospects. At the top of the pyramid is the so-called ‘select tier’ of about 70 companies. If these companies meet various profitability requirements for more than 12 months, the rules allow them to shift their listing venue to Shanghai or Shenzhen.

However, Caijing now predicts that rather than look to list on those two bourses the cream of the NEEQ could instead become the first batch of companies to go public on the BSE.

Why the focus on SMEs?

“SMEs can achieve great things,” the People’s Daily explained, in a remark that sounds like both a platitude and a policy endorsement. In fact the same comment has cropped up repeatedly across state media this week and it soon became clear why: the original remark was made by Xi himself during his 2018 ‘southern tour’ – a retracing of Deng Xiaoping’s famed journey to Guangdong in 1992 in which Deng emphatically endorsed the switch to a market economy.

The government has been trying to convey the message that it sees SMEs as the backbone of the economy for years and Beijing’s leaders have called on the state banks repeatedly to support the financing needs of smaller firms. Under Xi the efforts have intensified. In July six ministries published an action plan promising assistance for at least 10,000 “little giants” that specialise in “niche sectors”. According to the Global Times, the guidelines will support crucial breakthroughs in critical parts of global supply chains, especially in areas where China is vulnerable to a spiralling tech race with Western nations.

Another motive in the BSE plan, the Diplomat website noted, might be a bid to boost the SMEs as part of a policy to replicate aspects of Germany’s ‘Rhine capitalism’, which sees highly specialised Mittelstand firms clustering around larger industrial companies as their suppliers and partners (see WiC551 for our take on the government’s apparent effort to replicate aspects of Germany’s educational and economic model).

Other analysts believe too that the BSE could be yet another plank in Xi’s much-vaunted drive for ‘common prosperity’ (see WiC553). State media outlets have picked up on this agenda with alacrity, talking about how it will reshape society into an “olive-shaped” structure of a large middle-class and relatively few people who are ultra rich or extremely poor.

In a research report this week, Guotai Junan Securities suggested that by encouraging a proliferation of SMEs, the new stockmarket in Beijing will help to make the country more “olive-like”.

Of course, another characteristic of China’s smaller and medium sized companies is that they are much more likely to be privately-owned. And the message from the government to firms with this ownership background in recent months has been confusing. On the one hand they are lauded for their contribution to the economy. But on the other, some of the most successful firms have run into serious political flak.

One of the side effects of the various campaigns against the tech giants, ride-hailing companies and school tutoring firms of the past few months is the unease they have created in the private sector in general, for instance. Talk of a new era of ‘common prosperity’ has some entrepreneurs worried as well, wondering how it might restrict their chances of wealth creation.

Policymakers have been quick to reassure the business sector that this is not their intent. And in the same context, the promotion of the new bourse – as a means to help SMEs – is timely, reiterating the government message they are crucial to the economy.

Liu He’s speech to a conference on Monday made similar points: the private sector contributes more than 50% of tax revenue, more than 60% of GDP, and over 70% of the technological innovation in the economy. It also provides more than 80% of urban employment and accounts for more than 90% of market entities in China, he added.

Is the new BSE about regional rivalry too?

There are other interpretations of why the BSE is being introduced. Some see it as another attempt to erode the influence of China’s tech giants and private equity houses, for instance. Almost all of China’s leading unicorns feature at least one of the quartet of Alibaba, Tencent, Sequoia China or Hillhouse Capital as backers (as we pointed out in our Top 50 China Unicorn Ranking; see WiC530). Perhaps the BSE will provide an alternative channel of financing for the next herd of unicorns, allowing a broader group of investors to participate and break up what policymakers have increasingly viewed as a tech investment oligarchy.

Another key aspect of the Chinese economy – competition between cities and provinces – may also be in play. In the late 1980s, when planners were readying the first stock exchange in the modern era, the capital city was the first choice venue. But Beijing missed out on hosting the new bourse when turbulent political events in the city in the late eighties made further ‘radical’ market experimentation seem too risky to the country’s leadership, especially given the capital’s status as the seat of power. Both Shanghai and Shenzhen saw the opportunity to take on the experiment themselves. In the febrile atmosphere of the period, Shanghai was first to get the central government’s blessing and banged the opening gong on its new market in December 1990. However, in its classic freewheeling style, Shenzhen’s bourse had actually been operating on an unofficial basis for two weeks prior to Shanghai’s inaugural trading day (see WiC236).

Both cities continue to dispute which established the country’s first stock exchange of the new era. To settle the quarrel, the saying goes that “the SZSE was born first but the SSE got the first birth certificate”.

According to Caijing, another motive behind the launch of the BSE is to assist the central government in spreading the nation’s financial resources more evenly across the country. The magazine’s founder Wang Boming was one of the cadre charged with establishing China’s first stock market three decades ago (see WiC225). “Now we are very pleased to hear the Party Secretary’s [Xi] announcement to push the capital market from the south to the north, and serve the huge SME community,” he noted in Caijing this week.

Whether Beijing deserves to be the focal point of this ‘levelling up’ is open to challenge. Most of the largest banks are already based in the capital, for instance, as well as the headquarters of virtually every big state-owned enterprise. But it is the economies of the Yangtze and Pearl River deltas – both seen as ‘southern China’ in the country’s mental geography – that have been the primary sources of private wealth creation and entrepreneurial SME activity. Of course, the SSE and SZSE have contributed to their success by pulling in capital and supercharging their economies. Perhaps the capital is striking back, keen for an end to the maxim about the domestic economy: “strong in the south and weak in the north”.

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