IPOs: New Shanghai Board on Hold, as Qiyi, Ant Financial Wait

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New Shanghai exchange on hold

A new stock exchange being planned for Shanghai ran into unexpected headwinds last week, when signals coming from Beijing hinted at delays or even a possible scrapping of the board aimed at fostering emerging industries. Observers said the setback could deal a blow to fast-growth companies like Baidu-linked (Nasdaq: BIDU) online video service Qiyi.com and Alibaba’s (NYSE: BABA) Ant Financial, depriving them of an important source for new funding to fuel their development.

But the truth is that China already has two major specialty boards to complement its two main boards in Shanghai and Shenzhen. One of those, the ChiNext, is a Nasdaq-style enterprise board launched in Shenzhen in 2009. The other is a 3-year-old Beijing-based over-the-counter style board, often called the Third Board. The older ChiNext specializes in more mature high-growth start-ups, many of which would have previously gone overseas to list, while the Third Board focuses on earlier stage companies that are often still losing money.
Thus it was never really clear what purpose this new fifth board would serve, and the latest delay could reflect that fact.

Officials have been talking for more than a year about the newest exchange being planned for Shanghai, usually referred to informally as the strategic emerging industries board. Signals coming from the securities regulator had all pointed to a launch sometime later this year, though no specific date or even an official launch plan was ever given.

But all of that was thrown into question during the annual National People’s Congress that wrapped up last week in Beijing, where central government officials discuss their future plans and priorities. No mention was made of the new board in discussion of Beijing’s latest 5 year plan from 2016-2020, in a surprising omission that led many to speculate that plans for the exchange had been delayed or even scrapped. (English article; Chinese article)

Officials have been mum on the omission, leaving observers to guess what’s happening behind the scenes. Many believe officials in Beijing are most concerned with stabilizing the country’s volatile stock markets, which soared in the first half of 2015, only to tumble more than 40 percent since peaking last June. The regulator may worry that launching a new board in such turbulent times could flood the market with new shares, putting further downward pressure on the 4 existing exchanges.

New Exchange Needed?

The reality is that it was never very clear what new advantages this fifth exchange would bring to China, since many of the companies it would target look quite similar to ones traded on the ChiNext. One difference would have reportedly seen the new Shanghai exchange allow listings of money-losing companies, which is currently forbidden on the ChiNext. The Third Board in Beijing allows money-losing companies to list, but the exchange itself is only open to very wealthy investors.

But last year a securities official said the ChiNext was reviewing its requirements, and exploring options that would consider other factors besides profitability, such as revenue, company size and future growth potential, in the approval process for new IPOs. That implied that money-losing companies could soon be allowed to list on the ChiNext, which is open to ordinary investors, removing one of the few special features the new Shanghai board would have offered.

Rather than offering anything really new, the Shanghai board proposal seemed to reflect a growing rivalry between Beijing, Shenzhen and Shenzhen, which are quickly emerging as China’s 3 commercial centers. Following the roll-out of China’s 2 original main boards in Shanghai and Shenzhen in the 1990s, the 2 new boards have been added in Shenzhen and Beijing in the last 7 years. Thus some might say the proposed new board could have helped Shanghai keep pace with its 2 rivals.

Whatever the reasons, this new fifth board really does seem largely redundant and unnecessary. Even a massive market like the US only has 3 major stock markets, the New York Stock Exchange, Nasdaq, and American Stock Exchange. Each is run separately, and some also offer their own over-the-counter systems for the smallest companies.

China’s securities regulator should be commended for putting the brakes on this new stock exchange, which doesn’t really seem to offer any real new innovations and could simply clutter an already volatile market and confuse investors. Instead of opening more stock markets, the regulator should focus on working with market participants to clean up and refine the existing boards to make them more stable, less prone to manipulation and inclusive of a wide range of options for investors.

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