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The so-called second-board stock exchange – referred to as a Growth Enterprise Market, or GEM, after a similar exchange in Hong Kong – is most suitable for small and medium-sized enterprises to raise money, as it emphasizes the growth potential more than the profitability of enterprises that do not have a consistently stellar performance. Thus far, China’s stock market has been geared toward large companies, mostly state-owned, at the expense of smaller enterprises, which are the hungriest for money.
Under these circumstances, many companies operating in the Chinese market – from computer maker Lenovo and “China’s Google” Baidu to solar product manufacturer Suntech Power – have gone to Hong Kong, Singapore, London and New York to list their stock. Moreover, these companies have had to incorporate outside mainland China to get overseas listing approval from the CSRC.
The establishment of a secondary stock exchange is applauded, as it may stop the exodus of promising Chinese companies to foreign stock exchanges and give Chinese on the mainland an opportunity to invest and benefit from these companies.
In the meantime, the GEM makes possible the exit of venture capital invested in early-stage enterprises with viable business models. As Apple, Cisco, Google and Microsoft, among others, are well-known companies listed on the NASDAQ, which can be termed a growth enterprise market, the establishment of a Chinese GEM has long been viewed as a necessity for the growth of the high-tech industry in China – although many of the NASDAQ-listed companies are not necessarily high-tech.
However, having a secondary stock exchange is not sufficient to sustain the development of small and medium-sized enterprises and the high-tech industry in China. Already there are concerns that without vigorous governance, China’s GEM could become another “casino,” as its main-board “cousin” has been perceived.
Therefore, more important than having a growth enterprise stock exchange is creating a business environment in which small and medium-sized companies can grow. Credit rating, accounting, auditing and legal organizations should play their roles according to professional standards and ethics. Information disclosure rules should be firmly enforced, with trading based on inside information being prosecuted and punished.
The GEM also calls for knowledgeable and intelligent investors who understand the prospects with regard to investing in growth companies – they can expect not only hefty rewards, but may face uncertain and unstable performance, risky business operation and greater-than-average failure of the listed companies.
In this regard, venture capitalists could be critical to the success of the GEM, as their investment decisions represent an initial screening of a company’s risks and reward possibilities.
However, most of the venture capital firms operating in China are foreign entities run by ethnic Chinese managers. Not only have China’s regulatory regimes not been conducive to the operation of domestic ventures; domestic entrepreneurs, with few exceptions, are not seasoned professionals themselves in running businesses, let alone selecting and funding ventures and getting their hands dirty if necessary.
Therefore, a domestic venture capital industry, along with the arrival of a growth enterprise market in China, could help put more high-growth companies on China’s stock market, driving the nation in the next round of economic development.
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(Cong Cao is a senior research associate with the Neil D. Levin Graduate Institute of International Relations and Commerce at the State University of New York. He received his PhD in sociology from Columbia University in 1997 and has worked at the University of Oregon and the National University of Singapore. Dr. Cao is interested in the social studies of science and technology with a focus on China. ©Copyright Cong Cao.)
