Beijing Stock Exchange heralds fresh start for inclusive financial services

Retail investor Chen Yunlei showed up at his broker's office on Nov 12 and was granted permission to trade on the Beijing Stock Exchange on the last trading day before the long-awaited bourse's official opening.

The 49-year-old was one of the initial 2.1 million investors eligible to trade at the BSE, with each of them holding assets worth at least 500,000 yuan ($78,352) in personal securities accounts, as required by the central regulator. Since the bourse launched on Nov 15, the number of qualified individual investors has exceeded 4.3 million.

To further facilitate trading, the State Taxation Administration announced on Nov 14 that individual investors would be exempt from income tax on deals done at the BSE.Investors at the longer-established bourses in Shanghai and Shenzhen, Guangdong province, face income tax of 20 percent.

Despite the tax exemption incentive, Chen is in no hurry, even though public data show the total trading value of the first 81 BSE-listed companies exceeded 21.2 billion yuan in the exchange's first trading week, with these companies' prices rising by 3.75 percent on average.

Even companies with businesses related to the BSE, but listed on other boards of the A-share market, reported an average 9.37 percent rise in their prices for that week.

Chen, a self-proclaimed A-share market veteran with more than 16 years of investment experience, said he is adopting a wait-and-see attitude largely due to his lack of research into BSE-listed companies.

"I understand the BSE has been launched to support the development of smaller technology companies, but I need more time to understand where these companies' expertise lies and the prospects for their respective industries," he said.

Ethan Wang, head of wealth management investment strategy at Standard Chartered China, applauded Chen's cautious approach. Although there are now only 81 companies trading on the BSE, compared with some 4,000 listed on the main board of the A-share market, Wang said it is extremely difficult for individual investors to understand even 10 percent of the companies' business.

"The companies' technologies have not matured. It requires a lot of extensive background knowledge to assess if the technology will become an industry mainstream, or to estimate the potential market size of a product that is being planned," he said.

While the knowledge-intensive BSE may not be the ideal target for retail investors acting on their own, the bourse is important for the many small and medium-sized innovative companies, or SMEs, focusing on research and development, or R & D, of pioneering technologies. This is also one of the main reasons the exchange was launched by central regulators.

Built upon the NEEQ Select, the highest tier of the 8-year-old National Equities Exchange and Quotations system, the BSE started trading only 74 days after its inception.

Addressing the opening ceremony, Yi Huiman, chairman of the China Securities Regulatory Commission, or CSRC, said the Beijing exchange should become "a main territory "serving innovative SMEs, signaling a new start for China's inclusive financial services. BSE chairman Xu Ming also vowed at the ceremony to make the exchange more accessible to SMEs and test more trading products and tools to facilitate financing for such enterprises.

Vital factor

Access to financing is especially important for BSE-listed companies, which rely heavily on R & D investment to survive and thrive. The first 81 companies trading at the new bourse saw their average annual R & D investment valued at 25.3 million yuan last year, more than 4 percent of their annual sales revenue for 2020.

On average, A-share companies devoted 1.92 percent of their annual income to R& D last year.

Of the 81 companies, 87 percent are from the advanced manufacturing, modern services, high-tech services, and strategic emerging industries. Seventeen of the debutants are "little giants" recognized by the Ministry of Industry and Information Technology as leading SMEs that specialize in niche sectors, command a high market share, boast strong innovative capacity and core technologies. Most of the companies were launched between 2002 and 2006.

To help them successfully float on the BSE, central regulators have lowered the threshold. A company with market capitalization estimated at 200 million yuan can apply to go public at the bourse. More important, no stringent requirement has been set for BSE applicants' profitability, as they have invested a sufficient amount in R& D.

In comparison, the threshold is set at 1 billion yuan if a company plans to go public on the ChiNext at the Shenzhen Stock Exchange, which helps companies from traditional industries come up with new business models and patterns. A similar benchmark is set for the STAR Market at the Shanghai Stock Exchange, which aims to nurture large hard technology companies.

While listing requirements have been loosened at the BSE, this also means more complex issues for investors.

Wang, of Standard Chartered, suggested that individuals intending to invest in BSE companies turn to professional institutions, which have researchers with relevant academic backgrounds and additional industry insight.

With this in mind, the first eight BSE-themed mutual fund products went for sale on Friday. All the big names in this industry are on the product list, including E Fund, China Asset Management, Harvest Global Investments and China Universal. With each product's subscription limit set at 500 million yuan, a total of up to 4 billion yuan in funds will be raised. At least 80 percent of the funds will be used to invest in BSE stocks.

All eight products reached the 500 million yuan limit by noon on Friday.

Gu Xinfeng, fund manager at China Asset Management, said liquidity at the BSE will improve with more capital attracted by the mutual funds. As the first eight products are two-year closed-end mutual funds that exclude daily redemption, the idea of long-term and value investment will be better realized, he said.

Granting approval for the eight mutual fund products on Nov 12, the CSRC also stressed that fund managers should abide by the rules for long-term, value and rational investment. They should be responsible as professional investors in the market and as practitioners of inclusive finance. Continued efforts should be made to enhance fund managers' competency in research and risk control. This would enable them to give full play to their roles as institutional investors when helping with pricing of initial public offerings and taking part in secondary market trading, the CSRC said.

Major indicator

According to analysts Shenwan Hongyuan, in addition to attracting more capital, the participation of mutual funds indicates additional in-depth and extensive research, which will help interest more quality companies in floating on the BSE.

The quick action taken by mutual funds targeting the BSE also reflects institutionalization of the A-share market, which is a major indicator of its increasing maturity, Shenwan Hongyuan added.

A record set last year is evidence of the A-share market's continued institutionalization. A total of 1,432 funds were established in 2020, raising an unprecedented 3.2 trillion yuan combined. More than 1.19 billion effective mutual fund accounts had been opened by June, while equity funds have released a total of 3.3 trillion yuan in dividends to investors.

Yi, from the CSRC, said these statistics show individual investors' increasing trust in mutual funds, adding that such funds are playing an increasingly bigger role in the A-share market.

Janice Hu, China CEO at global financial services provider Credit Suisse, said the institutionalization of the Chinese capital market is an irreversible trend, with institutional investors now accounting for 20 percent of the daily trading volume on the A-share market, a figure that could not have been imagined 15 years ago.

According to industry experts, the participation of mutual funds at the BSE is just a small part of the maturing Chinese capital market at the rear of the financial industrial chain. The wider presence of venture capital and private equity players at the front end of the chain will result in the BSE's maturity helping to build a multilevel Chinese capital market.

Shenwan Hongyuan said exemption from income tax in BSE trading will facilitate such players' investment in NEEQ companies and help their invested companies go public on the Beijing exchange. The quality of the bourse will thus improve, a trend that will become increasingly apparent in the second half of next year.

Li Zhenhua, a partner with private equity fund management platform Cloudview Capital, said the BSE's launch is hugely important for venture capital and private equity players in the primary market, investors in the secondary market and those providing refinancing.

A successful exit is usually difficult for primary market investors, Li said. With the launch of the BSE, companies at an early stage of development, or which are on a small scale, are allowed to enter the secondary market. The exit channel for primary market investors is thus expanded and their capital can be used more efficiently. As a result, they will be more willing to invest, reducing the financing difficulties for startups. In this way, a multilevel capital market will be effectively built.

"Setting up different levels or layers is an intrinsic requirement for capital market development and perfection. A well-arranged multilevel capital market can ensure the efficiency of resources allocation. Most mature markets in the world have realized this goal over time," Li added.

Central regulators have been determined to set up a multilevel capital market in China, with this goal written into the new Securities Law, which took effect on March 1 last year.

Such an attempt was made in May 2016, with the introduction of the innovation tier to the NEEQ. Statistics show that since then, the number of institutional investors has risen by 50 percent, with stocks' liquidity improving by 20 percent and companies' valuations rising by up to 30 percent.

Li said companies trading on the innovation tier with increased profitability have gained more investment from private equity players and venture capitalists.

High hopes have been voiced for the BSE rising to become a Chinese version of the Nasdaq. But Wu Xiaoqiu, head of the China Capital Market Research Institute at Renmin University of China, said the Nasdaq is the result of a complete industrial chain. The "richness" of business models at the front end of the financial industrial chain has made it possible for the Nasdaq to flourish, Wu said.

"We should pay high attention to the development of angel funds, venture capitalism, private equity and buyout funds－the diversified financial businesses at the front end of the capital market. A lack of diversity in this respect will lead to huge difficulties in nurturing a market like the Nasdaq," he added.