China’s ‘comatose’ New Third Board needs shake-up

Source:Global Times Published: 2017/12/6 20:58:39

Illustration: Peter C. Espina/GT

The National Equities Exchange and Quotations, which is China's so-called New Third Board, may be a microcosm of the nation's technological innovation. Hundreds of billions of yuan in paper wealth have vanished, causing losses for many brokers, public funds and private equity firms. Many of them wish they had never heard of this market.

Most people in China are unfamiliar with the New Third Board, because it has a relatively high threshold for individual investors. They must have at least 5 million yuan ($755,950) in financial assets and more than two years of experience in securities investment to trade on the market. Therefore, the main investors in the market are proprietary funds of securities firms, asset managers, private equity funds and similar enterprises.

The New Third Board's legal status is the same as that of the Shenzhen Stock Exchange and the Shanghai Stock Exchange, but the New Third Board is for small, medium-sized and micro-sized enterprises. Listing requirements are relatively low, and it adopts the registration system instead of the approval system. Thus, within just six months, it had more than 3,000 listings. That number has since grown to 11,647, exceeding the total of the main boards and the Growth Enterprise Market (GEM).

The market index is the barometer for the New Third Board. On March 18, 2015, the market index was launched, and by April 7, 2015 it had reached its highest-ever level of 2,673.17 points. Recently, it even fell below the base of 1,000 to 999.18 points during one trading day before closing at 1,001.12 points, a new low.

The trading statistics for November 10 illustrate its downfall. There were 1,388 market-making enterprises as of that day, with 446 trading. Among those, 170 rose, 199 fell and 77 were unchanged. Total transactions were 225 million yuan, with an average turnover of 0.15 percent.

As to the private equity funds involved, according to industry information portal, there were 122 private equity products on the New Third Board, 82 of which had negative returns in the first 10 months.

How to solve the problem of this board? Speeding up the improvement of the board transfer system may be one way. In the past, the authorities had studied establishing a separate section in the GEM to enable some Internet and high-technology enterprises that yet to make a profit to move to the GEM after a year on the New Third Board. No regulations on this have yet been released.

Our scholars believe that the board transfer system is an effective method. Longer waiting periods and higher standards could be used, if a company can survive for three years with its overall business in good condition.

As we see, the number of listed companies on the New Third Board exceeds 10,000. This is 20 times more than the original number, with most of them related to science, technology and health. Among the listings are many "zombie" stocks, which can be eliminated through system design and improvement.

The New Third Board is comatose but not dead. Revitalization is possible and not too difficult. The current situation reflects flawed policies.

Because of China's high dependence on science and technology innovation, policy-makers should pay attention to the adjustment of the New Third Board. The board transfer system can be used to reawaken this market.

This article was compiled based on a report by Beijing-based private strategic think tank Anbound.


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