By Bi Xiaoning and Hu Yuanyuan (China Daily)
Updated: 2008-03-07 09:36

The long-awaited second board market is likely to be launched within two months - and for capital-hungry start-ups and high-growth firms, it can't come sooner.

Shang Fulin, chairman of the China Securities Regulatory Commission (CSRC), said at the annual NPC and CPPCC sessions that the regulator will collect public comment on the second board market's management in April, right after the two sessions, signaling its launch is imminent.

"We have prepared for the second board market and expect to launch it as soon as possible," said Shang, declining to reveal more details.

"It's the right time to set up a second board," said Zhu Wuxiang, a professor at Tsinghua University's School of Economics and Management. "The development of China's economy, the growing stock market, policies to encourage innovative SMEs and the rising investment passion for stocks and funds all point to a second board."

Similar to the NASDAQ's growth enterprise board, the nation's second board market will help small start-ups, especially high-growth and hi-tech firms, to raise funds.

The second board in the US allows SMEs to break the dominance of heavyweight companies and helps them to expedite growth. The US second board market reduced the time frame for establishment to IPO from seven years in the 1980s to five years in the 1990s.

A second board is also seen as an important part of the multi-level capital market system in China.

"It will help soak up excess liquidity and stimulate development of private equity," Cheng Siwei, vice-chairman of the Standing Committee of the National People's Congress, said.

But while the second board is likely to bring many opportunities, the risks for investors should not be overlooked.

It will be survival of the fittest on the second board, with only the few top performing high-growth companies likely to lure the venture investment they need.

With a lower listing threshold, the quality of the board's companies will vary and speculation is likely for "high-growth" firms.

Stock prices are expected to fluctuate as companies manage and leverage venture capital.

"The uncertainty and risk is really high, but there is no need for fear. The key point is to design effective principles and mechanisms to reduce risk," Zhu said.

Four areas need to be tackled, according to Zhu.

First, high standards should be set for the listed companies' competition status and growth capacity.

Second, a lower listing threshold doesn't mean lower requirements - companies should have strong growth potential, high efficiency and value.

Third, the listed companies should have strict corporate governance and internal controls.

And the role of the media, investment banks, legal and accounting firms should be enhanced, Zhu said.

"We can't just copy overseas countries' standards without profit requirements for listing, or copy the SME board standards with a three-year profit requirement," Liu Jipeng, a professor at the China University of Political Science and Law, said.

The new second board market's threshold for listed companies has been lowered, with a minimum requirement for net profit of more than 20 million yuan (US$2.81 million) for two consecutive years and 10 million yuan for the latest year. But it still needs regulatory approval.

"Risk recognition and precautions will be a crucial part of the second board. The CSRC wants to enhance risk prevention in areas including market access, continuous supervision, a de-listing system, trading system and investor education," a CSRC source said.

Qualitative indices will be created to supervise issuers' honesty, management and shareholders, the source said.

The number of companies to be listed is also up for debate - the second board needs enough competitive firms listed to make it active and efficient.

"The scale of the second board should be large enough. The number of listed companies could be 500 in one year - but 300 at least," Liu Jipeng said.

Liu said it would not be difficult to find 100 companies that have made a profit for over a year to issue more than 20 million shares in one province.

"Company resources for the second board are abundant. There are already 50,000 SMEs nationwide that are qualified to list," Liu Hongru, the first chairman of the CSRC, said.

"To avoid speculation, the number of companies listed in the first batch should be small, maybe 50 to 80," said an investment banker who did not wish to be named.

Some analysts said the size of the first batch of companies to list on the second board will depend on the market climate. They said it would be wise for a large number of companies to debut in a bull market; but a bear market would see a more gradual approach.

"The second board market will help to solve SMEs' financial problems, but that's not enough. More financial products should be made available," Li Yang, head of the Chinese Academy of Social Sciences' financial institute, said.