By
Darya Rudz
November 1st, 2023
The move to create the third exchange comes off as a proactive effort by the Chinese government to provide the framework for businesses to gain the right financial support from investors.
As much as 66 small-cap stocks belonging to small and medium-sized firms in China saw their share price rise today on the various Over-The-Counter platforms they were trading on. The reasons for the small cap stocks surge as reported by CNBC are hinged on the projections that the Chinese government is on track to launch a third stock exchange in Beijing. Per the report, the new trading bourse will open access to a new financing vehicle for small and medium-sized enterprises in the country.
Small Cap Stocks in China
Over time, small firms have often had struggles in securing funding from financial institutions, most of which are government-owned. The move to create the third exchange comes off as a proactive effort by the Chinese government to provide the framework for businesses to gain the right financial support from investors.
In China, small and medium enterprises, as well as some private firms, are responsible for the largest number of employment generation in the country, up to 80% according to CNBC. The new stock exchange amongst other things will create a safe haven whereby smaller firms can look to join either the Shanghai or Shenzhen exchanges. The initial listing is billed to be drawn from stocks already traded over-the-counter in the “select” section of the “New Third Board,” or National Equities Exchange and Quotations (NEEQ), according to the securities regulator.
Based on records, both the Shanghai and Shenzhen exchanges have higher IPO listing requirements, a positioning that has pushed major powerhouses like Alibaba Group Holding Ltd (NYSE: BABA) to seek listings outside of mainland China. The proposed third exchange will lower the barrier to entry for homegrown firms, especially now that the American stock market is becoming unfriendly to Chinese firms.
Broad Market Reaction to the Proposed Exchange
The potential for the new exchange has spiked a positive vibe across the Chinese market, with the least of the more than 60 firms billed to benefit from the new listing growing by 10%. Metal sheet producer Speedbird, specialized rubber products manufacturer Tongyi Aerospace and packaged food company Zhulaoliu were among the top 10 advancers. Per the report, about a third of the total firms rose by over 30%.
The proposed listing has positioned the Chinese financial market on a path of growth, with Cao Yanghui, director of the Nanhua Futures Research Institute, a brokerage based in Hangzhou noting the market is “proceeding at a relatively fast pace.”
Cao also noted that the distant dominant IPO registration process which seems to be out of touch with new entrants will no longer feel distant with the new stock exchange. The final details of the new stock exchange have not been issued by the market regulator, however, analysts believe the platforms will all work in tandem to guarantee a robust ecosystem for Chinese businesses.
“We see Beijing Exchange as positioned to support mid/small-sized firms and as a hub where the best of those firms can go to list on Shanghai and Shenzhen exchanges,” Morgan Stanley equity analyst Katherine Liu said in a statement.