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Beijing Review Exclusive
Special> Global Financial Crisis> Beijing Review Exclusive
UPDATED: April 10, 2009 NO. 15 APR. 16, 2009
Growth in the Making
China will introduce a Growth Enterprise Market to help small innovative businesses ride out the liquidity crisis

The regulator will begin accepting applications from candidates after issuing related rules and setting up a review committee. It did not reveal a launch date for the new board.

Timing is crucial

The securities regulator was about to launch the GEM last year after it issued the draft rules for the board in March. It postponed the plan after the Sichuan earthquake in May hit the capital market badly, fearing that a new growth board could further divert large sums of capital from the main board.

The capital market began to show signs of liquidity recovery starting this year, thanks to the effects of the economic stimulus plan.

"It's the right time to launch the growth board, because of lukewarm investor interest during the market recovery," said Xiao Shuilong, Chairman of Shenzhen-based CDF-Capital Co. Ltd. "The GEM launch could be a further strike if the market is hitting bottom, or it could give rise to speculation when the market is bullish."

Although China increased liquidity, the cash burn rate of SMEs has been accelerating because financial institutions have become more cautious about offering loans to startups during the economic downturn.

A majority of new loans have been injected into large state-owned enterprises and major infrastructure projects despite the bank loan surge that started early this year in China. SMEs in China, however, provide about 80 percent of jobs to urban residents and are a major driver of the country's long-term growth.

"The significance of the GEM launch at this special timing lies more with helping small businesses tide over the crisis than diversifying capital markets," Xiao said. "The availability of direct financing for small innovative startups will help China's private sector to grow and is conducive to China's long-term economic growth and employment."

But because many startup companies in China are quite small and are yet to be tested by the market, Xiao advised the regulator to adopt stricter rules to protect investors and ensure the steady development of the growth board.

Risk control

In terms of investor protection, the growth board will have some qualification requirements for investors or a qualified investor system to discourage novice investors.

Unqualified investors could still invest in the board through safer channels such as investor funds, said Song Liping, President and CEO of the Shenzhen Stock Exchange.

The Shenzhen bourse also will stress sponsors' responsibility and extend their supervision period, she said.

"We support the CSRC in adopting stricter measures of risk control, implementing stricter requirements on information disclosure, and recommending the life sponsor system the AIM adopted, " said Ji Qing, President of Hangzhou-based Silicon Paradise Venture.

Thanks to its life-sponsor system, the AIM board has had fewer IPO frauds since its establishment in 1995.

The CSRC's regulations also place emphasis on the innovative spirit of growth companies and require that invisible assets account for 30 to 50 percent of candidates' net assets.

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