Chinese President Xi Jinping noted during his recent inspection in Shanghai that we must focus on the pivotal issue of technological innovation, employ scientific innovation as a preemptive tool, grasp the general trend of industrial revolution and drive industrial development with technological innovation. Today, after we visited the East Lake Hi-tech District of Wuhan, we have a more profound understanding of his speech and become more determined to create innovation chains centering on industry chains and improve finance chains with a focus on innovation chains. China has entered the new stage in which innovation is vital to its development. Promoting integration of technology and finance, supporting the development of strategic emerging industries and hi-tech industries and extending services to innovative growth SMEs are of great significance to spurring innovation and entrepreneurship, increasing employment opportunities, improving employment quality, boosting the rapid growth of innovative economy and facilitating industrial restructuring and upgrading.
Along with the fast growth of China’s multi-tiered capital market in recent years, its capability in serving technological and innovative businesses has continued to improve. As a result, a great number of leading enterprises in emerging industries posted good results with the support from the capital market, which further boosted our confidence to combine technology with capital. Take Shenzhen Stock Exchange (SZSE) as an example, there are altogether 1578 listed companies on the Main Board, SME Board and ChiNext, among which 1021 are state-level hi-tech enterprises and 532 are in strategic emerging industries. These listed companies are the representatives of the hi-tech industry. According to their 2013 annual reports, against the backdrop of the macroeconomic slowdown, these companies recorded fast revenue growth, high profitability and continued increase in fixed asset investment and R&D intensity. They also conducted M&As actively through the capital market and were highly recognized by investors. Last year, there was a structural rise in the index of ChiNext, a segment dominated by enterprises in strategic emerging industries and hi-tech industries.
This May, the State Council released the Several Opinions on Further Promoting the Sound Development of the Capital Market (“the new Nine-point Opinions”) which drew up a comprehensive plan and general arrangement from the overall perspective of China's economic and social development for the reform, opening-up, development and supervision of the capital market in the new era. In order to give full play to the functional advantages of the capital market in leading innovation and entrepreneurship, the new Nine-point Opinions required accelerating the development of the multi-tiered capital market, expanding the Main Board and SME Board, speeding up ChiNext reforms and enhancing the institutional arrangement for the development of innovative growth enterprises. The new Nine-point Opinions also required expediting the improvement of the National Equities Exchange and Quotations (NEEQ, the national OTC Market) and incorporating the regional equity markets in the multi-tiered capital market system. All these measures will facilitate the capital market’s effective link-up with the innovative enterprises that are in different growth stages and follow different growth patterns, thus giving its key support to the development of these enterprises.
Last week, as an important move to implement the new Nine-point Opinions, China Securities Regulatory Commission (CSRC) released the revised ChiNext IPO and refinancing rules. Enterprises in strategic emerging industries are characterized by nonlinear growth, while the previous listing criteria are more for traditional industries with too much emphasis on the continuity and stability of track record. As a result, many innovative enterprises that are in the critical stage of their development tend to fail the regulator’s IPO review and lose financing opportunities due to temporary volatility in performance. On the contrary, once they reach the listing criteria, more often than not, they enter the “middle and later periods” of growth and do not have large capital expenditure. If they enter the capital market at this moment, there might be capital mismatch and idleness, and what’s more, it is hard for investors to share the fruit of rapid development of innovative enterprises. For this reason, the revised IPO rules eased the requirement on financial indicators, scrapped the requirement for sustained growth and streamlined other IPO criteria.
The launch of the ChiNext refinancing rules filled a gap that has been vacant for five years since the inception of ChiNext. It also created a small-sum fast financing system for innovative businesses that are in dire need of money. Since emerging industries change fast, enterprises have a high requirement on decision-making efficiency. Take M&A as an example, most M&A deals on ChiNext are horizontal integration or industry chain integration and are intended for absorption of talents and technology. They feature high frequency, small size and fast speed. For enterprises, business opportunities are transient. The establishment of the ChiNext small-sum fast financing system is a good attempt to align the capital market to the needs of innovative enterprise.
In the next step, we will explore how ChiNext reverts to its original purpose of serving technological and growth enterprises that are promising but not yet profitable.
We noticed that the new Nine-point Opinions formally decided to incorporate regional equity markets in the multi-tiered capital market system. This will have a far-reaching effect on promoting the combination of capital with technological start-ups and innovation. In August 2012, the CSRC released the Guiding Opinions on Regulating Securities Companies' Participation in Regional Equity Trading Markets, which ushered in a new period of systematically regulating and developing the regional markets. In the recent two years, following the State Council’s clean-up of various trading venues, some local governments began actively exploring ways to develop local equity trading centers so as to make up, in a bottom up approach, the weak links in the capital market’s service to local SMEs, especially technological SMEs. With the concerted efforts of various parties, regional equity trading centers have begun to play the following functions: Firstly, they provide a capital market service platform for local SMEs and offer SMEs the opportunities to access at the very beginning the valuable venture capital and entrepreneurship guidance from professional intermediaries and investment institutions. Secondly, they facilitate the construction of corporate credit information platform, break the bottleneck of “information island” in corporate credit, and lay the foundation for the improvement of regional financial ecologic environment, thereby attracting and bringing together various financial elements in the region. Thirdly, they serve as an open and transparent platform for the use of fiscal and technology supporting funds and facilitate public supervision of the use of fiscal funds. Fourthly, the platform can be used for ownership affirmation and restoration of assignment right, thus enabling equity-based financial services and commercialization of technological achievements, which will help integrate various forces and strengthen synergy. Fifthly, they provide plenty of M&A resources for the integration, transformation and upgrading of various industries and also serve as a withdrawal channel for venture capital. Take Wuhan Equity Exchange (WEE) for example, by the end of this April, nearly 200 enterprises were quoted and 400-odd enterprises completed equity trusteeship. These enterprises raised RMB 660 million in total proceeds through private placement and obtained RMB 7 billion in bank loans using the equity in trusteeship as collateral. As such, WEE made a new breakthrough in combining technology with finance.
It is because of such important value that SZSE actively participates in the development of regional equity markets like WEE. The incorporation of regional equity markets in the multi-tiered capital market system will, on the one hand, cement the market basis of stock exchanges by allowing potential listed companies to operate like joint stock companies even when they are still small through quotation on regional markets, and on the other hand, help magnify the exemplary role of stock exchanges as the effect of the latter’s optimization and accelerated development will quickly spread to regional markets, thereby enlarging the service scope of the multi-tiered capital market.
In conclusion, with the gradual implementation of the new Nine-point Opinions, the combination of technology with capital will reach a new level. As a pivot in the Yangtse River Economic Zone, Hubei province will play a more important role in the new round of economic transformation and upgrading. Wuhan East Lake Hi-tech District is a national independent innovation demonstration zone. With concentrated resources of technology, education and innovation, the district has displayed its key role in the restructuring and upgrading of local economy. In recent years, it continued to make breakthroughs in exploring in an all-round way the new mechanisms of combining technology with finance. Presently, 10 enterprises in the district are listed on SZSE’s SME Board and ChiNext Market. In the next step, with the continued expansion of the service scope of the multi-tiered capital market that comprises the Main Board, SME Board, ChiNext, OTC market and regional markets in Wuhan, we believe that the multi-tiered capital market will more closely and comprehensively link up with the East Lake Hi-tech District as well as the technological, innovative enterprises and emerging industries in Wuhan and will support and lead the province’s innovation-driven development and speed up the restructuring and upgrading of local economy.