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Beijing’s new trading venue – Beijing Stock Exchange

by Christina Gigler, Rödl & Partner Beijing

The growing Chinese capital market, both the stock and the bond market, is often neglected by foreign investors. However, many domestic Chinese companies (especially technology-focused) choose an initial public offering (IPO) as a form of financing. IPOs are also the preferred exit form for Chinese financial investors. In early September, President Xi Jinping announced that China will establish a new stock exchange in Beijing (Beijing Stock Exchange) and develop it into a major trading platform for innovative small and medium-sized enterprises (SMEs). The Beijing Stock Exchange is now the third in mainland China, joining the Shanghai and Shenzhen exchanges that were introduced in the 1990s.

Trading in an initial 70 companies from the “selected tier” could begin on the National Equities Exchange and Quotations Co., Ltd. (NEEQ, also known as the “New Third Board”) as early as the end of 2021. It was originally intended as China’s counterpart to NASDAQ as part of the construction of a multi-tier capital market system. The Beijing Stock Exchange is to be structured to be an improved version of the New Third Board and has the potential to establish itself as a major third pillar in the capital market alongside the Shanghai Stock Exchange and the Shenzhen Stock Exchange.

The official website of the National Enterprise Credit Information Publicity System announced that the corporate registration for Beijing Stock Exchange Co, Ltd, was completed and established as well as approved on September 3, 2021. The new stock exchange will be fully owned by NEEQ, which is the sole shareholder. The registered capital is one billion yuan.

De-concentration of southern trading centers

Locating the new stock exchange in the capital is no coincidence – it offers both practical and political advantages. A factor on a political level could be the imbalance of capital resources, as China’s main stock markets are currently positioned in eastern and southern China. On a practical level, Beijing has already laid the foundation for a stock exchange specializing in SMEs with NEEQ. The main objective is to allow SMEs to access the capital market because even though 99.8 percent of enterprises in China are considered SMEs and account for about 50 percent of China’s tax revenues, a large proportion of enterprises face considerable difficulties in accessing alternative sources of financing.

The announcement and formation come at a time when there is growing concern about a possible decoupling of the Chinese economy and the US government is taking steps to make it more difficult for Chinese companies to go public in the US. Since the end of 2020, for example, Chinese companies listed on US exchanges have been required to undergo an audit by a US regulator. Many Chinese companies are being forced to delist because they are prohibited from allowing foreign regulators access to their accounting records without Chinese government approval.

In addition, in early July 2021, China’s cyberspace authority announced that companies with more than one million users must undergo a security review before listing their shares overseas. With regulators concerned that Chinese companies transferring data overseas could cause cybersecurity and national security risks, China is taking steps to encourage companies to push their IPOs domestically. The establishment of the Beijing Stock Exchange could thus be part of this effort.

The role of the new Beijing Stock Exchange in China’s financial system

The Beijing Stock Exchange will serve a different purpose than the existing Shanghai and Shenzhen exchanges while maintaining links with these markets. For example, shares on the Beijing Stock Exchange may be transferred to the Shanghai and Shenzhen exchanges under certain conditions. The Shanghai Stock Exchange is now the largest in mainland China and an important pillar of the national economy. It specializes in listing companies of basic industries and key sectors.

In addition, the Science and Technology Board (STAR Market), a trading market specialized in startups and high-tech enterprises, was established in the summer of 2019. Mainly companies from the fields of high-tech industry, from strategic new industries such as new-generation information technology, high-end equipment, new materials, alternative energy production and saving, environmental protection and biomedicine, and others, are listed on the STAR Market.

The Shenzhen Stock Exchange lists various market indices with different market positioning, e.g. Blue-chips with high market capitalization. As a second market – similar to the American NASDAQ – ChiNext was introduced in 2009, which specializes in private and technology companies. With the Beijing Stock Exchange, a specialized trading venue is now to be created for SMEs. At the same time, NEEQ, with around 6,000 SMEs listed by the end of 2020, will be upgraded.

In mid-September, the Beijing Stock Exchange issued guidelines outlining the criteria for qualified exchange participants. To be listed on the Beijing Stock Exchange, retail investors must have securities assets of at least ¥500,000 (about €67,000) and an investment history of more than two years. No capital threshold has been set for institutional investors. In early November, the Beijing Stock Exchange Trading Rules (Trial) and the Beijing Stock Exchange Member Management Rules (Trial) were published, along with basic business rules and guidelines that will come into effect on November 15, 2021, which also indicates this was the planned official launch of the Beijing Stock Exchange.

Three-tier market access criteria

The NEEQ was established largely for micro-enterprises, SMEs, and start-ups that are unable to meet the listing standards of the Shanghai and Shenzhen stock exchanges. Currently, NEEQ uses a tier system for investors, with different thresholds for each tier. Only if companies meet one of these tiers are they eligible to trade on the New Third Board.

The Beijing Stock Exchange will adopt the three-tier system to manage the investment event. The three tiers are:

  1. the “selected tier” (currently 70 companies) – exclusive and with the strictest requirements for high quality NEEQ companies that have high profitability or are very innovative,
  2. the “innovative level” for companies that do not meet the requirements for the selected level but are well managed, and
  3. the “basic level” for all other companies.

The Beijing Stock Exchange will only incorporate companies from NEEQ’s “selected tier”. Companies in the other two tiers will remain in NEEQ’s OTC market. Listing on the Beijing Stock Exchange will be possible for companies if they have been listed on the “selected tier” of NEEQ for 12 consecutive months, meet the expected market value and certain financial standards, are registered with the CSRC, and have conducted a public offering to non-specific qualified investors.

There are currently no specific rules for foreign investors. It is expected that the rules for trading by foreign investors will be in line with the relevant NEEQ rules.

With the introduction of the 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. Regulation for domestic (private) companies planning IPOs overseas or in Hong Kong (S.A.R.) has been tightened in recent years. A prominent example is ride-hailing service provider DiDi, which had to undergo a cybersecurity audit in China shortly after going public in the US and was sanctioned with a ban on downloading its app in China.

Christina Gigler, LL.M., is Senior Associate and Head of the Legal Department at Rödl & Partner in Beijing. She assists and advises clients on their market entry in China. She specializes in corporate law, corporate restructuring, labor law, and contract law.

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