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Huayi Brothers Media, producer of recent hit movie The Message, took a battering of late on Shenzhen's new GEM Board.

SHENZHEN'S GEM Board, which officially opened for business on October 30, fell drastically earlier this week amid high trading volatility.

These developments, along with the high recent average price-to-earnings ratios of the GEM’ s 28 listcos (71.6 times versus 32.4 times for the Shanghai Composite Index), have prompted Liu Xinhua, vice chairman of the China Securities Regulatory Commission, to call for stricter oversight of the new trading platform.

Initial alarm bells certainly went off for the bourse regulator as the new board - called by many China’s equivalent of the Nasdaq - got off to a flying start last Friday with values more than doubling on trading debut.

Speaking at the Fifth Beijing International Finance Expo, Liu said his commission would work fervently to enhance regulation over the SME-heavy board, stymie speculative trading, crack down on market manipulation and prevent insider deals.

The audience was expertly targeted, as there were several important players present who all assume important roles in ensuring the smooth running of the new board, including some 30 banks, 40 fund management firms, 20 brokerages and 30 financial services institutions.

Liu pointed to recent performance by traders as indicative of potential volatility in the market, saying that as of the end of the third quarter, total assets of domestic brokerages reached 1.82 trln yuan, with net profits over the period hitting 67.8 bln yuan, up 44.8% and 65%, respectively, from a year earlier.

The vice chairman added that factors such as a rapidly expanding capital market combined with numerous and sometimes unstable external influences have the net effect of making stock market regulation and oversight even more difficult than the task would ordinarily be.

He proposed three areas in which his organization would work to promote stability in the new Shenzhen GEM Board. 

First, all throughout the bourse’s development, it should always employ scientific management and regulatory practices in helping build stability and fair practices into the trading platform, and maintain these practices to ensure smooth operation in years to come.

Officials and regulators with hands on the board’s levers should frequently be given updated training and instruction to ensure that best-practice methodology is in place. This will also help those overseeing the GEM be better able to both anticipate and then report suspicious anti-market activities that have the potential to endanger the stability of the fledgling board.

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Beijing Toread Outdoor Products Co executives in a publicity shoot. New listcos including tentmaker Toread saw major corrections in their first few days on Shenzhen's new board.

The CSRC, China’s bourse watchdog, would also continuously promote market-based and market-friendly solutions to resolving various glitches that will inevitably pop up from time to time on the GEM Board.

“These practices will help make fair-market practices the norm rather than the exception in the capital markets. We must also strengthen transparency and oversight over additional share issues, as well as clarify and enhance rules and regulations regarding shareholder rights,” Liu said.

Liu added that the CSRC would learn from some of the problems with the 28 listco IPOs so as to boost investor confidence in the stability of the bourse.

“We also need to promote better risk assessment and risk management, especially regarding futures trading and internal company controls.”

Second, he said that to promote overall economic development in the country, financial and securities regulators should all work together to help the most competitive, innovative and growth-destined firms list on the GEM Board and other domestic platforms.

Finally, he urged existing and potential investors in the new GEM Board to fully educate themselves on the companies they were considering pumping their hard-earned money into, and also studying up on the latest regulations and performance of the new board so as to minimize risk and maximize potential profits.

His words of warning followed some very volatile valuation shifts in the early days of trading on the GEM Board.

All but three of the 28 new stocks on GEM Board fell on Monday, their second day of trading, with 20 of these dropped to their daily limits of 10%.

Alibaba- backed Huayi Brothers Media Corp tumbled by the daily to 63.73 yuan after rallying 148% on Friday.

Another sharp mover was camping equipment maker Beijing Toread Outdoor Products Co, plummeted by the daily limit to 45.06 yuan after jumping 153% on its debut.

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