What does the future hold for Chinese companies listed in the US?
Hong Kong (CNN Business)The Beijing Stock Exchange, President Xi Jinping’s new financial baby, is finally here.
The bourse was first announced by the Chinese Communist Party leader in September, and is intended to help small and medium-sized enterprises raise capital.
The first batch of 81 firms started trading on Monday, including 10 initial public offerings from companies in tech and manufacturing. Shares in those IPOs surged at the open and hit circuit breakers, before closing with an average price increase of 200%.
Autos components maker Tongxin Transmission was the standout performer with an eye-popping gain of 494%. The other 71 companies listed in Beijing were previously trading on an over-the-counter system for companies not listed on China’s premier stock markets in Shanghai and Shenzhen.
The exchange’s launch is of strategic significance to Xi’s economic and political vision. This is the first time that a bourse has been set up in Beijing, giving the nation’s capital and political center more influence in the world of business and finance.
It comes at time when Xi has been cracking down on some of the country’s biggest tech giants, which had until recently been growing at an almost unbridled pace. The communist leader’s campaign aims to ensure that wealth and capital is not concentrated in the hands of a few industry juggernauts.
The launch of the BSE may provide some relief to companies in the tech sector, which are facing major regulatory hurdles from both the United States and China to raise money overseas.
Helping new and small businesses
When Xi first announced the idea of a Beijing-based exchange in a speech in September, he said that he wanted to create a “primary” funding platform” for “service-oriented” and “innovative” small businesses.
Small and medium-sized enterprises traditionally face difficulties in obtaining funds from China’s state-owned banking system because of their lack of collateral and other constraints.
But if China is to realize Xi’s ambition of surpassing the West in advanced technologies, these companies will need to grow and innovate.
In 2018, as the US-China trade war raged, Xi unveiled a board for startups on the Shanghai Stock Exchange — the Star Market — which focuses on companies with “core technologies in key fields,” such as high-end semiconductors and computer processors. There is also a Nasdaq-style board on the Shenzhen Stock Exchange, the ChiNext, which was established in 2009 to target high growth startups.
The Beijing Stock Exchange will “complement” the Shanghai and Shenzhen stock exchanges and focus on serving innovative smaller firms, the Chinese Securities Regulatory Commission said in September. As of now, the companies listed on the BSE have an average market value of around 3.9 billion yuan ($610 million).
Increasing the influence of Beijing
Mainland China’s major stock exchanges are located far from the country’s political center in the north. The Shanghai Stock Exchange, which was established in the eastern city in 1990, hosts mostly large-cap companies, including state-owned enterprises, banks and energy firms. The Shenzhen Stock Exchange, in southern China, has a bigger proportion of tech companies.
(Hong Kong, the former British colony in southern China, also has an international stock exchange that is subject to different regulatory and legal systems. It’s free of the type of strict capital control that Beijing imposes on the mainland.)
“The establishment of BSE is conducive to balanced regional development and will increase the influence of northern China [on the] capital market,” said Luo Zhiheng, chief macro analyst for Guangzhou-based Yuekai Securities, in a recent research report.
In addition, the Beijing Stock Exchange can “better serve the capital city’s core positioning of becoming the nation’s centers of politics, culture, international exchange, and technology and innovation, ” a goal set by Xi in 2014, Luo said.
The launch of the Beijing-based exchange also comes as the door is closing for Chinese tech IPOs overseas, due to stricter scrutiny on these firms in both China and the United States.
Beijing has been encouraging its companies to list at home and become less dependent on foreign money and technology, a campaign that intensified during the 2018-2019 trade war with the United States.
It also appears keen to prevent the huge amount of sensitive data held by tech companies from falling into the hands of foreign governments — manifested in its surprising move in July to suspend Didi days after the ride-hailing giant’s US IPO, citing data collection violations.
On Sunday, the Cyberspace Administration of China proposed tougher rules for tech firms planning overseas listings. Companies that seek to list in Hong Kong must submit to cybersecurity inspections if they hold data that concern national security, the regulator said.
Firms with more than 1 million users must also seek cybersecurity approval before they list overseas, it added, reiterating a guideline from July.
“China’s leadership has grown more wary of its firms listing in the United States … in particular for firms that control significant amounts of data,” said analysts from New York-based Eurasia Group in a recent research report.
“Indeed, the newly announced Beijing Stock Exchange is intended to help smaller Chinese companies raise capital outside the United States,” they said.
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