Q: What do you think about the timing of the official launch of trade on the GEM board in Shenzhen on October 1 of this year? Is there any significance to it also being the 60th anniversary of the founding of the PRC?
Zhang Yuzhong, GM, Sinolink Securities.
Mr. Zhang: In March of this year, the CSRC announced its first official regulations regarding the operation and oversight of the new board, with the rules being implemented two months later. This actually marked the official launch of the new board. Therefore, in order to do a trial run of the new board and work out the kinks, there have been some mock listings purely for analytical and academic purposes to test the waters and make sure the related regulations were suitable for the GEM.
This helped to boost investor interest and understanding of the board, and also has raised the expectations of firms looking to raise capital there. It is important to remember that this capital-raising conduit has been on the drawing table for over a decade. So, the deliberately cautious and meticulous preparation demonstrated the tremendous complexity that goes into such a launch, and regulators do not at all take their responsibility lightly here. So the anticipation is almost palpable, and it is fitting that China’s first board of this kind is launched on its National Day, October 1.
China’s GDP is growing at its slowest rate in a decade, and the global economy is mired in recession, so why launch the GEM board amid all this?
Mr. Zhang: The ability to attract and then efficiently utilize investment is the most important function of a capital market. Premier Wen has repeatedly said: “To face this current slowdown head-on, it is critical to continue to offer our strong support to both private investment and private enterprise. As for China’s SMEs, the biggest growth hurdle they face is an underdeveloped capital market.”
Therefore, there is tremendous motivation and purpose on the government’s behalf to promote the GEM board. Firstly, it will help streamline and strengthen China’s capital markets overall. Secondly, the government is hoping to create innovative businesses to carry growth forward, whether it be technologically creative IT firms or more nimble and scientific management methodologies. This is an ongoing campaign.
Many SMEs in China have seen phenomenal growth this past decade, but they are sorely in need of a more effective capital-raising regime. The GEM board is specifically designed to reward to most innovative, profitable and visionary firms with investors willing to jump onboard. It also holds the promise of helping to ensure more stable and long-term growth of the country’s overall economy.
How do you think the GEM board will affect the current A-share markets?
Mr. Zhang: The GEM will help revitalize and modernize China’s overall capital market system. Some people are overly concerned about a potential hemorrhaging of capital from the existing boards to the GEM. But these worries are unwarranted. It will not be so easy to shift funds and investment between the main board and the GEM. That being said, there certainly will be some migration of capital to the new board that would otherwise end up in the A-share or SME board markets.
But at the same time, the launch of this very important new board will boost interest and understanding of the capital market system in China, and draw many more stock investors to all the boards. More choice, some competition and enhanced transparency and information will enhance the long-term health and vitality of China’s capital markets. I look at the GEM as potentially providing a life-giving transfusion of fresh new capital into a system that will greatly benefit from it.
Will listing requirements or additional share offer regulations for the GEM be much less stringent than for the existing boards?
Mr. Zhang: From the standpoint of financial performance, it can be said that the GEM listing thresholds will be less onerous. That being said, if observed from other angles, it can be argued that the GEM will be harder in some ways to win entry to. From July 1 of this year, the CSRC released its GEM listing requirements, and at that time a few examples of the GEM’s tougher threshold rules became evident.
For example, rules on: 1) Distinguishing between major and controlling shareholders; auditing; underwriting regulations which didn’t exist previously. 2) Listing rules: not just notifying direct shareholders of changes and announcements, but also those indirectly affected; additional share placements, etc… So, in short, as you can see it is not just the capitalization and revenue minimum restrictions that determine how strict a capital market is to accepting new member.
Will the GEM be like a mini-Nasdaq and attract mainly technology and IT firms?
Mr. Zhang: Generally speaking, firms like these are quite innovative and in tune with new opportunities, and often also enjoy the fastest growth of all industries. Therefore, it is only natural that such firms would thrive on boards like Nasdaq and GEM because they are the domain of much venture capital and high-growth funds that attract not only a lot of investment, but also nurture management and innovation that refuses to simply do things the “old way” for the sake of tradition. For most of them, going public is the best – and oftentimes only – option to pursue fast growth and profitability. More importantly, listing helps these firms become better adept at risk management, more market savvy, innovative and nimble in a very challenging industry and economic environment. And it is these skills that help to separate the wheat from the chaff among listed companies these days.
I can foresee that after the GEM launch, a large number of domestic high tech and IT firms will be drawn to the capital raising opportunities that it offers, and a lot of these firms will get a warm reception if they are admitted. The ultimate goal for the creation of this new capital raising platform that will spur on the growth of the most innovative, market savvy small and medium-sized firms in China and help them find ways to invest in new self-developed, sector-moving technology. But the board will not be exclusively the domain of high tech firms. But don’t make the mistake of thinking this board will rise as quickly as dedicated tech boards with more experience lest you forget the original intent of the board – to grow private SMEs in China into true listco players.
Does your firm, Sinolink, anticipate a surge in GEM board-related clients? How do you plan to help them?
Mr. Zhang: Sinolink Securities Company Ltd’s core client base are SMEs with fast growth potential. We have a very rich and nuanced understanding of how these enterprises think and operate. We can readily pick out potential standouts, identify their competitive advantages and make investments and client relationships based on this heavily-researched knowledge. Our investment team prides itself on this excellence, and we also are committed to serving all our clients with the utmost professionalism and attention.
We realize all client needs are not the same, but we feel we have the staff size and experience to meet each and every need that arises, even in times of market volatility. Sinolink is very adept at recognizing an opportunity from the earliest conceptual stages, and getting our clients onboard so that returns can be optimized.
Do you anticipate many A-share listed companies jumping ship for the GEM board?
Mr. Zhang: The GEM board is intended to both broaden and enhance China’s capital markets. It ostensibly adds more layers of opportunities and enriches the whole system. The boards will complement one another, so I don’t expect A-share listcos to abandon the main board for GEM.
How will China’s ongoing 4.5 trln yuan economic stimulus package affect the GEM board?
Mr. Zhang: We can already see that since the stimulus package, the Shanghai Composite has risen this year (by nearly 80%), and the economic slowdown has already likely hit bottom from the perspective of a whole panoply of market indicators. So the package has likely had a positive impact. But unfortunately, the level of new investment in the economy has mainly been public funds and there has not been a corresponding vibrancy in private sector investment in the recent China growth story. Therefore, if the stimulus package is the main driver then economic growth will not be sustainable at current levels.
So this makes the GEM launch all the more critical, for it offers a new capital raising scheme for heretofore under-funded insufficiently invested standouts in the country’s SME sector. So hopefully the spur that the stimulus package has given to the economy, as well as the birth of this new board, will boost both confidence and opportunities for investors here and ensure more stable and sustainable growth going forward.
The A-share markets have generally been notoriously restrictive toward foreign participation. How will the GEM board compare?
Mr. Zhang: I believe the GEM board will offer more opportunities for offshore-based operations. For example, it will allow limited partnership entities to become shareholders of GEM-listed firms. This is not possible on the A-share and SME boards of past, as there are legal and technical-related barriers to such relationships. This will likely be another draw of the GEM board – its more open attitude to offshore funds.
Do you think the GEM board will help in the development of global brands in China?
Mr. Zhang: China’s banking industry cannot possibly provide sufficient and affordable funding for all the domestic SMEs with big dreams and talent to match. At the same time, state-backed investment has its limitations as well, especially in fast-moving industries. Therefore, these firms are best served by seeking the bulk of their funding from the private sector. However, the riskier world of hedge funds, venture capital and private equity is not for everyone and can’t meet every enterprise’s needs, no matter how ambitious they are. After all, most venture capital funds are in the business of getting a firm to list, then taking away the profits and running off to the next opportunity.
Therefore, the multi-layered capital market system that will gradually come into shape after October 1 is part and parcel of the government’s desire to bring about more stable growth with a more mature stock market. From every country’s perspective, the launch of a GEM board is usually to boost development of technology and the SMEs that make their living in the sector. Just look at what the Nasdaq, which launched in 1971, helped give birth to. Microsoft, Intel, Dell and Cisco Systems are just a few examples. So who knows, perhaps the GEM will produce a few Chinese branded global firms as well.
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