China’s flurry of tech regulation has made it clear the country’s increasingly keen for firms to list at home, rather than in the US. Now Xi appears to be moving to bring tech IPOs even closer to the Chinese regulators that oversee them, with a new stock exchange in the country’s capital.
The new exchange, which Xi announced last week in a speech addressed to an international trade fair, would be Beijing’s first, with the country’s existing exchanges based in finance capital Shanghai and the tech hub of Shenzhen. Xi stopped short of giving a timeline for the launch of the new bourse, but it took only about eight months from the leader’s previous announcement of a specialized tech board in Shanghai for it to launch.
The new exchange will be built upon the Beijing-based National Equities Exchange And Quotations, an over-the-counter market for trading shares of unlisted companies. The first candidates for the new exchange will be selected from ones that have been trading for over a year on the NEEQ, also known as the “New Third Board,” according to the China Securities Regulatory Commission.
The announcement comes as Beijing’s vying to strike a balance between its increasing scrutiny of tech giants that it sees as having expanded too wildly, and the necessity of keeping its economy growing partly by deepening capital market reforms. In announcing the new exchange, Xi promised to support the development of small and medium-sized companies focusing on innovation, which authorities fear have been crowded out as investment flowed to the largest firms or to startups linked to them.
When it comes to IPOs, regulators have been taking an increasingly harder line. Last November, Chinese financial authorities canceled the dual listings of fintech giant Ant Group, while this year, in the wake of what seemed to be Didi’s successful US IPO, the country’s top internet regulator opened a national security investigation into the firm’s user of user data, and issued draft rules requiring most tech firms to undergo a cybersecurity clearance prior to an overseas IPO. Other investigations have led to delays in numerous planned IPOs. Shanghai authorities are also reportedly halting the process by which Chinese firms invest in their offshore entities through the variable interest entity structure—a setup that has allowed foreign investors to bypass restrictions of investing in Chinese firms in the past years.
The new exchange could contribute to Beijing’s goal of increasing the proportion of corporate funding coming from capital markets in order to reduce reliance on banks, wrote analysts from investment bank Jefferies in a note.
In a statement last week, the Chinese markets regulator said the new exchange is a “major strategic deployment” to push the high-quality development of the country’s capital markets, and that the agency’s Communist Party committee, was “highly inspired” by the plan.
For many, the announcement brings a feeling of déjà vu.
The Shenzhen exchange launched the ChiNext market in 2009, which was dubbed “China’s Nasdaq” due to its focus on attracting innovative startups. Then in late 2018, Xi made a surprise announcement of the STAR market, a board on Shanghai’s stock exchange dedicated to hosting tech companies, and granted investors and companies greater freedom in IPO pricing and listing thresholds, offering what appeared to be a more streamlined process. But the flurry of regulatory actions has hurt investor confidence, and it’s unclear how a new exchange will revive that.
In March alone, 76 companies suspended their IPO applications with the STAR market amid the stricter scrutiny of the regulators, double the number of cancellations the previous month, according to the Financial Times.
What’s also in question is whether the new board could end up diverting listings from China’s existing exchanges. Only last month, the state-owned Beijing Daily touted the NEEQ as an “incubator” for companies to list on the STAR market, and quoted a scholar who said that the big trend would be more NEEQ companies trading on the Shanghai-based board.
Now, the tide seems to be changing again, potentially setting up the exchanges for a “tripartite confrontation,” according to Rock Jin, CEO of investment adviser PopEton.