Money-short small business owners should feel relieved. The high IPO hurdles of China's main stock exchanges preventing emerging enterprises from going public are ready to be cleared due to the emergence of a growth enterprises market board--something of a Nasdaq with Chinese characteristics.

According to Wang Shouren, Vice Chairman of the Shenzhen-based Venture Capital Association, public opinion is being solicited on the draft plan for the market and it is expected that the first group of 50 companies will go public on the board early next year.

The growth enterprises market (GEM) board, or the secondary board, is an alternative stock market offering emerging small and medium-sized enterprises an avenue to raise capital for further development. Compared with the main board, the GEM board has lower listing requirements. The market enables enterprises with good business ideas and growth potential to obtain a listing and provides an exit ground for investment made by venture capitalists. For investors, the GEM board brings higher returns, as well as higher risks.

After the GEM is approved by the State Council, the detailed listing qualifications, transaction rules, as well as information disclosure regulations, will be successively announced, said Wang.

"The GEM board is of crucial importance to promoting the development of growth enterprises, particularly hi-tech businesses, with high growth potential and core competitiveness," said Lu Xing, an analyst with China Merchant Securities. "The launch of GEM board, keeping pace with the entire capital market in China, will bring them enormous opportunities."

Ripe for the picking

Preparations for the introduction of a GEM board have been under way since 1999. The Chinese Government has recently enacted laws and regulations making it clear that the construction of a GEM board should be actively promoted, including the Law on the Promotion of Small and Medium-Sized Enterprises and the Provisional Measures on Administration of Venture Capital Enterprises. The newly amended Corporate Law and Securities Law lower the listing requirements and loosen stipulations on incentive stock options, among other things, providing legal supports for the launch of a GEM board.

China has already accomplished the shareholder structure reform of listed companies, which has boosted the slumping Chinese stock market and created a friendly environment for introducing a GEM board. Besides this, lessons have been learned by officials with the Securities Regulatory Commission from operating China's small and medium-sized enterprises (SMEs) board--a subordinate of the Shenzhen main board--for the past three years.

The pressing desire of numerous SMEs, especially emerging enterprises, has helped speed up the introduction of a GEM. According to a survey of 15,000 hi-tech companies by the end of 2006, analysts in the Shenzhen Stock Exchange believed SMEs have fallen out of favor in the domestic capital market--SMEs raised a total of 14.1 billion yuan last year, about 8.9 percent of the entire funds raised in the securities market.

The time is right for China to introduce the GEM board, said Zhang Yujun, General Manager of the Shenzhen Stock Exchange.

The more the merrier

Enterprises in the IT field account for a large portion of hi-tech companies in other countries, something that is reflected in their various GEMs. The U.S. Nasdaq market, for instance, has many big names on its board, such as Microsoft, Intel and China's Sina, Sohu and Netease.

In China, however, the performance of IT companies on the domestic main boards has been far from appealing to investors. By July 23 this year, only nine of the total 143 listed companies on the Shenzhen SMEs board had been IT companies. Ni Zhengdong, CEO of Zero2IPO, attributed this to the high entry barriers that keep SMEs off the board.

The goal of the new board is to introduce a new financing platform for SMEs without lowering the listing requirements and to help those hi-tech SMEs with growth prospects to later list on the Shenzhen Stock Exchange. Listing applicants are required to have a track record of profits for three consecutive years. The problem this creates though is that IT applicants with a track record of three years of profits have usually passed through their high growth phase. Even if a company grows dramatically after this phase, it might not be as hungry for funding as it was when it started, said Ni.

Many Chinese IT companies chose to go public on the Nasdaq, Japan's Jasdaq or the UK's AIM, because "all of them offer listing opportunities for IT companies in the Chinese mainland," said Ni.