The China Securities Regulatory Commission’s move to merge the mainboard with the SME board in Shenzhen is the latest attempt by onshore regulators to consolidate China’s capital markets.
The CSRC announced a plan to combine Shenzhen Stock Exchange’s mainboard and its SME board last week. The move is part of Beijing’s plan to reform the 30-year old Chinese capital markets. It also represents another step towards a market-wide implementation of a registration-based equity financing system. The change will affect 35% of companies and close to 30% of the market capitalisation in the A-share market.
Regulators are pitching the move as a tweak, reassuring market participants few things will change after the merger. Listing conditions, investor requirements and the current trading mechanism will all remain in place, as will the approval-based system. All companies will continue using the same stock codes. Bankers also expect the impact on valuation of individual companies to be limited, given the different sectorial focuses and average P/E ratios of the two boards.
Still, there are advantages to combining the two boards. The most obvious is boosting the attractiveness of Shenzhen, which is the plucky sibling to the bigger Shanghai exchange.
Shenzhen’s stock exchange has gradually lost its appeal to Chinese firms in recent years. Some 1,422 Chinese IPOs were sold over the past five years, but less than half of those were completed in Shenzhen, according to Wind data. Trading volumes in Shanghai were more than three times of those in Shenzhen in January, according to data from the two exchanges.
Shenzhen’s mainboard is also being overshadowed locally. The SME board, established in 2004, has grown to be the largest of SZSE’s three submarkets, housing 1,001 listed companies with a total market cap of Rmb13.93tr ($2.16tr). In comparison, the mainboard is home to 468 firms worth a combined Rmb9.84tr, and the start-up focused ChiNext board with 907 companies worth Rmb11.12tr.
The fact that the main board is, in volume terms, Shenzhen’s minor board should come as little surprise. Shenzhen decided almost 20 years ago to stop approving new main board IPOs, although a handful of firms have managed to list through M&As — most recently in December 2017. Although Chinese regulatory actions are often clouded in unclear language, the move appeared to be designed to move the market towards a greater focus on SMEs.
The SME board has seen a 108% year-on-year rise in new listings in 2020. The amount raised on the mainboard through post-IPO financings such as follow-ons and rights issues — known collectively as equity ‘refinancing’ onshore — have also lagged. SME-listed shares are also more actively traded.
Industry leaders such as Hangzhou Hikvision Digital Technology and carmaker BYD have also listed on the SME board, despite the fact that the companies were valued at Rmb735bn and Rmb557bn, respectively. That pushes the definition of ‘SME’ almost to breaking point. (BYD is also listed in Hong Kong with a market cap of HK$831bn, or Rmb692bn.)
In other words: Shenzhen’s move appears long overdue. But while the merger of the two boards will give a boost to the city’s stock market, particularly the mainboard, it is even more meaningful as a move for China to consolidate its capital markets.
The country’s market is one of the most difficult to navigate globally, especially for foreign investors. The different access schemes and quotas aside, investors need to understand the difference between the various submarkets and the available products.
Take the Rmb117tr Chinese bond market for example. The market is split between an interbank bond market and an exchange market. A group of regulators — the People’s Bank of China, China Banking and Insurance Regulatory Commission, the CSRC, National Association of Financial Market Institutional Investors and National Development and Reform Commission — oversee different corners of the two markets.
For corporate issuance, there are a variety of bonds with different — and sometimes confusing — names depending on the markets and different regulators, such as the so-called ‘company bonds’, ‘enterprise bonds’, and ‘debt financing instruments’ that include short-term commercial paper, super short-term commercial paper and medium-term notes — just to name a few.
Investors face the challenge of understanding the different products, markets and regulators, and the issuers are also tasked with choosing which format to issue and where.
That problem also exists, albeit to a lesser extent, in the country’s stock market.
Between the different exchanges, there are two mainboards, an SME board, the ChiNext board, the Star board and an over-the-counter ‘New Third board’. The difference between some of these boards can be subtle. In addition to the blurred line between the two mainboards as well as Shenzhen’s main and SME boards, Shenzhen’s ChiNext and Shanghai’s Star also overlap in certain areas. That is not to mention that companies and investors sometimes also have to choose between A-shares, H-shares and US-listed American depositary receipts to go public or to invest in.
A lot of this has created unnecessary barriers for investors — particularly foreign accounts — as well as Chinese companies when it comes to accessing the onshore market.
There have been applaudable efforts from Beijing in recent years to further develop its capital market and loosen the access restrictions. There is plenty more work to be done in this regard — but the recent changes at the Shenzhen exchange are a clear step in the right direction.