New Beijing Stock Exchange – An Overview

last updated on 1 December 2021 | reading time approx. 2 minutes

by Christina Gigler

Update:
Trading on the new Beijing Stock Exchange started on 15 November (last Monday). The first batch of listed companies comprised of in total 81. Out of the 81 stocks, 71 migrated from the "select tier" of the NEEQ, while 10 are new stocks, which had previously been traded on the "innovation tier". At the end of the first trading day, all 10 newly listed stocks had gains, while the other 71 stocks had a more modest performance. The auto parts manufacturer Henan Tongxin Transmission Co., Ltd. performed the best, closing with 494 percent above its IPO price. The weakest was Tonghuijiashi (Beijing) Information Technology Co., Ltd., with a 16 percent loss.

The growing Chinese capital market, both equity market and bond market, is often neglected by German investors. Today, however, many local Chinese (especially technology-oriented) companies see IPOs as one of the most common forms of financing. IPOs are also the preferred form of exit for financial investors in most cases.

Since September 2021, there has been a new stock exchange in Beijing. Chinese President Xi Jinping announced on 2 September 2021 that China will set up a Beijing Stock Exchange and build it into a major base for serving innovative small and medium-sized enterprises (“SMEs”). The new third national stock exchange on the Chinese mainland may begin trading as early as the end of the year with an initial 66 companies from the "selected tier" at NEEQ (see section C below), market insiders say.

Basic information

It is shown on the official website of the National Enterprise Credit Information Publicity System that the Beijing Stock Exchange Co., Ltd. (“Beijing Stock Exchange”) has completed business registration, and was established and approved on 3 September 2021. The registration information shows that Beijing Stock Exchange is wholly owned by National Equities Exchange and Quotations Co, Ltd. ("NEEQ") as its sole shareholder. Its registered capital is RMB 1 billion. The registered address of the Beijing Stock Exchange is the same as that of the National Stock Exchange Corporation.

Role of the new Beijing Stock Exchange

The Beijing Stock Exchange will play a different role from the existing Shanghai and Shenzhen exchanges and is expected to better serve the development of innovation-oriented SMEs, the China Securities Regulatory Commission ("CSRC") said in a statement shortly after the announcement of the new exchange.

The Shanghai Stock Exchange was established in 1990 and is now the largest stock exchange in Mainland China and an important pillar of the national economy, key enterprises and companies in basic industries. In addition, the Science and Technology Board (STAR Market), which mainly lists start-ups and high-tech companies and specialises in supporting high-tech industries and strategic new industries such as new-generation information technology, high-end equipment, new materials, alternative energy generation, energy conservation, environmental protection as well as biomedicine as well as emerging industries, etc., was officially opened in summer 2019.

The Shenzhen Stock Exchange (SZSE) was also founded in 1990 and lists various market indices with different market positioning, e.g. the Shenzhen Stock Exchange is positioned for blue chips with high market capitalisation. As a second market - similar to the American NASDAQ - ChiNext was established in 2009, which specialises in private and technology companies.

Thus, the Beijing Stock Exchange is to upgrade the existing NEEQ. By the end of 2020, almost 6000 companies, mainly SMEs, were listed there. The distribution of roles is thus clearly regulated - and shows the Chinese government's efforts not to underestimate the value of SMEs within the national economy and to offer innovation-driven companies new financing opportunities, corresponding to the Chinese government's strategy to become innovation leaders. At the same time, interconnectivity with the two stock exchanges in Shanghai and Shenzhen is to be strengthened.

How will the new Beijing Stock Exchange work

The Beijing Stock Exchange has published draft regulations on listing, trading and member administration for public comment until 22 September 2021. In addition, the CSRC has published several draft regulations for public comment until 3 October 2021, including provisions on the governance structure of the exchange and the responsibilities of the exchange in supervising share issuers.

On 17 September 2021, the Beijing Stock Exchange issued guidelines outlining the criteria for qualified stock exchange participants. Retail investors must have securities assets of at least RMB 500,000 and have an investment history of more than two years to be listed on the Beijing Stock Exchange. No capital threshold has been set for institutional investors. According to the CSRC, stocks to be traded will not be allowed to rise or fall more than 30% within a single trading day. Also, new listings will not underlie any caps on price changes on their first day of trading. Only upon their second day of trading the daily price limit will be applicable.

The NEEQ, also known as the New Third Board, was set up in 2012 in order to serve micro companies, SMEs and startups, which are not able to fulfill the listing standards of the stock exchanges in Shanghai and Shenzhen.

The trading on the NEEQ is currently divided into three tiers,
(1) the so-called “select tier” (currently hosting 66 companies) for high-quality companies of the NEEQ, which are supposed to have good profitability or are very innovative,
(2) the “innovation tier” for companies which do not meet the requirements for the “select tier”, but are well-managed, and
(3) the “base tier” for the remaining companies.

The Beijing Stock Exchange will integrate the “select tier” companies of the NEEQ. Companies in the other two tiers will remain in the over-the-counter market of the NEEQ. Companies can be listed on the Beijing Stock Exchange if they have been on the “select tier” for 12 consecutive months, meet the expected market value and certain financial standards, have registered with the CSRC, have completed a public offering to nonspecific qualified investors and meet requirements for the proportion of public shareholders.

Outlook

With the establishment of the third, and very specialised, Beijing Stock Exchange, the Chinese government is trying to keep IPOs of Chinese, technology- and future-oriented companies in the country, as it did with the establishment of the STAR Market on the Shanghai Stock Exchange. The regulation of domestic (private) companies planning an IPO abroad (e.g. in the USA) or in Hong Kong has been increasingly tightened in recent years. A prominent example is the driving service provider Didi, which had to undergo a cybersecurity audit shortly after its IPO in the USA, resulting in a download ban of its app in China. The planning phase for the Beijing Stock Exchange has not yet been completed, which continues to raise questions that cannot be answered until 2022 at the earliest, such as:

Will foreign-invested enterprises be able to list on the Beijing Stock Exchange?
Will the establishment of the Beijing Stock Exchange draw funds from the Shanghai and Shenzhen markets?
What impact will it have on the Chinese stock market?
Which sectors of the economy will be affected?
What impact will it have on investors?

Traditionally, German investors finance their subsidiaries in China through shareholder or bank loans. However, financing on the capital market can also be an alternative. We will follow further developments.