President Xi Jinping announced the plan to set up a stock exchange in Beijing in his opening speech at the Global Trade in Services Summit of the 2021 China International Fair for Trade in Services on Sept 2. The new stock exchange will be adapted from the National Equities Exchange and Quotations system, which has been dubbed the “new third board” and was launched in 2013. In response to the news, share prices on the Hong Kong Stock Exchange fell more than 2 percent the following day.
China already has three securities exchanges, in Shanghai, Shenzhen and Hong Kong. The addition of a Beijing Stock Exchange would, in some people’s opinion, squeeze their market share and gains. The Shanghai and Shenzhen stock exchanges are not listed companies, leaving the HKEX as the only market responding to the news.
The Beijing Stock Exchange’s market position is different from that of Shanghai’s and Shenzhen’s. It is geared toward fundraising for “specialized and new” enterprises. Currently the “new third board” has three levels of listed companies ranked according to profitability requirement for IPOs: “basic”, “innovation” and “special pick”. Companies at the “special pick” level can choose to list on the ChiNextboard of the Shenzhen Stock Exchange or the Sci-Tech Innovation Board of the Shanghai Stock Exchange if they have met the requirements after being listed for at least a year on the “new third board”. However, the requirements for IPOs on the main boards of both the Shanghai and Shenzhen stock exchanges are significantly higher than for the “special picks” on the “new third board” at this moment. The Beijing Stock Exchange will fill this “gap” by focusing on financing needs of “special picks” on the “new third board”. All existing “special picks” on the “new third board” will be transferred to the Beijing Stock Exchange, and companies listed on the “innovation level” of the “new third board” for at least 12 months can also transfer to the Beijing Stock Exchange if they meet the requirements. This arrangement means relatively small companies with lower market caps will have a better chance of being listed on the Beijing Stock Exchange than they would on Shanghai’s and Shenzhen’s.
The launch of the Beijing Stock Exchange is apparently part of a new national development strategy. Instead of worrying about competition from the Beijing Stock Exchange, the HKEX, and the whole Hong Kong financial market for that matter, should think about how they can seize the opportunities created by the country’s development strategy adjustment for the city’s own financial industry development moving forward
The financial markets in Hong Kong and international investors should pay more attention to these questions: What is the political and economic significance of China’s top leadership’s decision to set up the Beijing Stock Exchange; and how should the HKEX and the whole financial market for that matter find new development opportunities from the Beijing Stock Exchange launch?
China’s top leadership had no plan to make Beijing a financial center, which has always been Shanghai’s role. The financial authority of the country has also maintained that two stock exchanges in Shanghai and Shenzhen are enough for enterprise fundraising in China. That means the opening of the Beijing Stock Exchange is a major breakthrough in the nation’s financial market layout.
The economic foundation of this breakthrough is the fact that China is now the second-largest economy in the world and has maintained steady growth despite a series of big shocks in recent years. As far as the sheer size of China’s economy is concerned, there is definitely room for a new stock exchange in the country.
There is a real need for a new stock exchange on the Chinese mainland, as those in Shanghai and Shenzhen cannot satisfy the financing needs of “specialized and new” enterprises just yet while the industrial structure adjustments and transformation on the mainland require a large reserve of “specialized and new” small and medium-sized enterprises to complement big corporations.
The political significance of this breakthrough is that the Beijing Stock Exchange will elevate Beijing’s importance on the economic and financial front, thus strengthening the command center status of the nation’s capital in political affairs as well. Beijing is already home to the country’s central bank and most of the headquarters of State commercial banks and of many non-banking financial institutions. Earlier this year, the construction of the Lize Financial Business District, the second of its kind in the city, was basically complete and started partial operation. It is positioned to serve as a pilot zone for emerging financial industry development and financial reform experiments in the nation’s capital. In the 14th Five-Year Plan (2021-25) period, Beijing will also build a comprehensive demonstration zone for further opening-up and a free trade area, which will provide a proving ground for top-level financial institutions and high-tech firms to conduct digital finance research and development, and applications. Noteworthy is that the Digital Currency Research Institute of the People’s Bank of China, the country’s preeminent top-level design and basic research entity, is among the first prominent tenants to open in Lize.
The politico-economic significance of the Beijing Stock Exchange lies in it being part of a strategic response of the nation’s top leadership to the accelerating pace of unprecedented changes in the global power balance by stepping up deployment of the dual-circulation development model, with the domestic market-driven internal circulation as the main growth engine complemented by external trade-driven external circulation. In other words, it is a must, rather than a second thought.
The launch of the Beijing Stock Exchange is apparently part of a new national development strategy. Instead of worrying about competition from the Beijing Stock Exchange, the HKEX, and the whole Hong Kong financial market for that matter, should think about how they can seize the opportunities created by the country’s development strategy adjustment for the city’s own financial industry development moving forward.
The Growth Enterprise Market board of the HKEX should think about a “division of labor” with Shanghai’s Sci-Tech Innovation Board, Shenzhen’s ChiNext and the Beijing Stock Exchange. Shares to be traded at the Beijing Stock Exchange are allowed to apply for listing on Shanghai’s Sci-Tech Innovation Board or Shenzhen’s ChiNext board if they have met the respective requirements. That means mainland-based “specialized and new” SMEs now have a complete channel for direct fundraising within the mainland. Therefore, there will not be much incentive for them to seek an IPO on the HKEX’s GEM board. Right now, the only advantage HKEX’s GEM board has over its mainland counterparts is the free convertibility of the Hong Kong dollar, but it may weaken or even disappear sooner than one thinks with the renminbi gaining ground in free convertibility as yuan-denominated foreign trade grows on the back of a fast-expanding domestic market on the mainland. The HKEX’s GEM board must be prepared for the inevitable to happen before it is too late.
That means the HKEX must focus much of its resources and attention on expanding its main board in the days to come. One of the areas worth exploring intensively is providing fundraising services to companies from emerging markets along the Belt and Road Initiative trade routes, especially those under a common law system like Hong Kong and with close connections with Western developed economies. In the process, Hong Kong could enhance its status as an international financial center, benefiting all stakeholders in the city.
The author is a senior research fellow of China Everbright Holdings.
The views do not necessarily reflect those of China Daily.