China’s IPO reforms are providing a vibrant, capital ecosystem for SMEs

By: Sha Yan, President, Shenzhen Stock Exchange Sep 2021

Small and medium-sized companies (SMEs) have emerged as a major power for high-quality economic growth as China embraces a new round of technological revolution and economic transition.  

Currently SMEs are responsible for 65% of invention patents, 75% of technological innovations and 80% of new products in China. In fact, SMEs, with their dynamic, diversified and differentiated business models, constitute a resilient fabric of almost every economy in the world.  

However, among their growing pains, lack of access to capital stands out as a common challenge, especially during the COVID-19 pandemic. It’s one of the basic functions of stock exchanges to serve as an efficient hub for resource allocation. SME financing will be given special emphasis at the WFE’s 60th General Assembly and Annual Meeting, which will convene in Shenzhen, China this month. This article presents the latest experience of Shenzhen Stock Exchange (SZSE) in building a vibrant ecosystem that supports SMEs through the capital market as part of the exchange’s effort to create an innovative capital center and promote high-quality economic development.  

Last month marked the first anniversary of Registration-based IPO Reform at the ChiNext Market, its 1000th IPO and RMB1 trillion (~US$155 billion) in cumulative IPO proceeds. ChiNext Market, dedicated to financing innovative and entrepreneurial SMEs over the past 12 years, launched comprehensive reforms of its basic institutional arrangements by adopting the registration-based system in August 2020. The IPO reform aims to enhance the market’s openness, inclusiveness, and adaptability in response to the emerging financing demand from the innovative sector.  

Registration-based IPO reform   

On August 24th last year, ChiNext Market launched the reforms in a market-oriented and law-based direction and with an open, transparent, honest and rigorous approach. Focused on the registration system, the reform covers IPOs, further financing, mergers and acquisitions, on-going supervision, issuance and underwriting, and trading mechanism. The changes broaden corporate financing channels, optimize issuance conditions, improve price discovery of the market and regularize delistings, reinforcing the foundation for market-wide implementation of the registration-based reforms.  

The pilot reform at the ChiNext market represented an important step forward both for fresh IPOs as well as existing listed issuers. Despite the complexity, SZSE completed preparation for the reform in only four months and ensured stable operation afterwards by emphasizing institutional innovation, technological support, market service, and risk control.  

Embracing innovation, invention and ingeniousness, the reform encourages SMEs in traditional industries to adopt innovative technologies or reinvent their business operation in new business sectors, new business forms or models. All measures converge to create a capital ecosystem congenial with growth and development in innovative enterprises.   

With information disclosure at the core of registration and vetting, the reform streamlines and simplifies issuance conditions according to ChiNext Market’s positioning and characters of potential SME issuers. To cater for SMEs at different stages of development and for different SME types, SZSE also offers multiple sets of conditions, taking into consideration diverse parameters, including market capitalization, revenue, and net profitability in a more inclusive approach.  

Real economy 

Registration-based reform has also been implemented in further financing, introducing improvements on issuance conditions, fast-track small-size offering, and shelf offering. As of the end of August last year, the ChiNext Market had accepted applications for further financing worth RMB381.4 billion (~US$59 billion) under the registration-based regime, strengthening the market’s role in direct financing in support of the real economy.  

SZSE has also established a new book-building mechanism focusing on institutional investors on the primary market. The band of price fluctuation on the secondary market is expanded, price limits in the first five trading days are eliminated and SBL (securities borrowing and lending) is introduced on the first trading day along with new measures for price stabilization. The new trading mechanism, in line with the registration-based system, is designed to foster rational and value investment.  

In conjunction with the reform arrangements, the SZSE revised the Listing Rules for ChiNext Market twice in 2020 to amend the delisting mechanism for improved quality of existing listed companies and enhanced efficiency of the market in resource allocation. The amendments have included market value and compound financial indicators as part of delisting conditions while simplifying and streamlining the delisting process. With these measures, SZSE has built a market-oriented regularized delisting mechanism, forming a market ecosystem that recognizes the superior and eliminates the inferior.   

The reform also heightens the intermediaries’ responsibility and accountability, clarifies the verification obligations of sponsors, and defines the role boundaries of sponsors, accountants, and lawyers. It strengthens the supervision of intermediaries in review and registration, issuance and listing, and in ongoing supervision and urges intermediaries to effectively perform verification and professional inspection.  

Enhanced legal framework and innovation   

In the past two years, major breakthroughs have been made in the rule of law in the capital market. The registration-based issuance system and class action have been written into the new Securities Law, greatly increasing the cost of violation and safeguarding the full implementation of the reform. With the 11th amendment to the Criminal Law put into effect, securities and futures crimes including fraudulent issuance, false information disclosure, provision of false certification by intermediaries and market manipulation are subject to harsher criminal penalties.  

The Supreme People’s Court has issued special judicial opinions on the reform to implement centralized jurisdiction over related cases and has issued judicial interpretations on proxy proceedings of securities disputes to ensure the smooth implementation of the reform.  

With its commitment to fostering innovation, the reform has seen the ChiNext market emerge as a financing hub for diverse types of emerging-industry companies backed by strong innovation and R&D capabilities and impressive business performance.   

Firstly, the ChiNext Market represents a diversified sector mix. Since the launch of the reform, the market has received 727 IPO applications representing over 50 sectors. Among those applications, 28 elected for the newly added “market cap & income” standard, benefiting from the market’s greater inclusiveness in admitting innovative companies at various development stages.   

Secondly, the market has formed an emerging-industry cluster. The ChiNext Market hosts companies from all nine strategic emerging industries. About 500 listed companies are from the new-generation IT, biomedicine, new material and high-end equipment manufacturing sectors with total market value exceeding RMB8 trillion (~US$1.3 trillion). A batch of notable companies have risen to lead emerging supply chains based on their technological and business innovations.  

Core competitiveness  

At the same time, a group of “emerging giants”, or nationally certified SMEs that distinguish themselves by being specialized, competitive, differentiated and innovative in niche sectors, are also rapidly clustering in the ChiNext Market. The ChiNext Market has now 133 listed “emerging giants” with a total market value of over RMB1 trillion (~US$155 billion).  

Thirdly, the market is backed by R&D and driven by innovation. ChiNext-listed companies have always relied on high R&D spending to enhance their innovation capability and core competitiveness. From 2009 to 2020, the cumulative post-listing R&D investment reached RMB497.3 billion (~US77 billion). As of the end of August 2021, the average R&D intensity of the 1,011 companies listed on the ChiNext market has exceeded 5%, and their R&D staff accounted for nearly 20% of the total workforce on average. 123 companies are recipients of the State Science and Technology Advancement Award claiming more than 130,000 core patented technologies related to their main businesses. These R&D and innovation endeavours have been a strong impetus for advancing commercialisation of research results and innovation-driven development.  

Fourthly, ChiNext market sees growing profitability in its listed companies and increasing returns on its index. In 2020, ChiNext companies achieved an average net profit of RMB134 million (~US$21 million) representing an increase of 42% year-on-year. Since 2020, the accumulated growth of ChiNext Price Index has registered 91.32%, ranking at the forefront amidst the world's major indexes.  

Long-term attraction 

Registration-based IPO reform, with transparency at its core, has helped improve listed companies’ information disclosure and corporate governance performances, and improve ChiNext Market’s appeal medium-to-long-term investors from home and abroad.  

First, the reform has accelerated the cultivation of innovative enterprises which constitute a new driving force for China’s long-term sustainable economic growth. The ChiNext Market brings together the best players in high-tech industries such as 5G, artificial intelligence, industrial Internet, Internet of Things, semiconductor chip fabrication, and biomedicine, representing the long-term growth trajectory of the country.  

On the green industry front, 260 relevant companies are listed on SZSE, covering fields such as energy conservation and environmental protection, new energy, and ecological restoration, forming an important force to drive the country’s sustainable development. With the country implementing national strategies of innovation-led development and setting carbon emission goals, technology is called in to action for renewed power for growth, highlighting the long-term value in the ChiNext Market’s development.  

Second, the reform underlines the long-term investment value of listed companies. In terms of information disclosure, Environmental, Social and Governance (ESG) performance is incorporated in the new information disclosure requirement. The China Security Regulatory Commission recently (CSRC) supplemented a provision for voluntary disclosure of measures to reduce carbon emission to the “Environment and Social Responsibility” section of the chapter on Content and Format of Information Disclosure.   

Green Indexes  

SZSE has also included ESG disclosure in its disclosure assessment of listed companies. At the SZSE in 2020, 380 issuers, including ChiNext-listed companies. released social responsibility reports and 1,972 listed companies disclosed information related to social responsibility. The SZSE also provided listed companies with opportunities to issue green bonds, carbon-neutral bonds, and green ABS.  

The exchange has also designed and released 24 green indexes. Some ChiNext-listed companies have voluntarily adopted international standards on climate and ESG, integrating them into their corporate strategies. With encouraging progress in ESG and climate performance, ChiNext issuers closely engage with long-term investment institutions to jointly promote responsible investment. 

Third, the reform emphasizes information disclosure and removes regulatory restrictions. In recent years, in the wake of the successful implementation of the QFII (Qualified Foreign Institutional Investors) regime, SZSE has launched Shenzhen-Hong Kong Stock Connect, Shenzhen-Hong Kong ETF Link and Shenzhen-Japan ETF Link to widen channels of access for international capital. Global indexes such as MSCI and FTSE have also continuously increased the weight of A-shares. ChiNext-listed companies are required to maintain investor relations services. SZSE hosts regular online roadshows for ChiNext-listed firms to meet international investors.  

SMEs evolve and adapt to changing business environments and so must exchanges as the critical infrastructure of the market. The post-pandemic world is experiencing a slow, unbalanced and unstable economic recovery. As stock exchanges, we need to enhance our ability to foster innovation, support SME financing and contribute to the vitality and resilience of economic recovery.  

SZSE is delighted to host the WFE’s 60th annual conference this month. As a Chinese saying goes, “No distance can set apart bosom friends sharing a heart.” I would like to cordially welcome all colleagues and experts to the online and on-site conferences to discuss the resilience of exchanges as market infrastructure and our roles underpinning economic recovery.   




The views, thoughts and opinions contained in this Focus article belong solely to the author and do not necessarily reflect the WFE’s policy position on the issue, or the WFE’s views or opinions.