The Chinese government looks determined to press ahead with the launch of a growth enterprise stock market devoted to listings of small companies even as the country's main stock markets show little sign of pulling out of headlong plunges from last year's historic highs.

The proposed board, to be similar to Nasdaq or the Hong Kong stock exchange's Growth Enterprise Market, is regarded as a necessary part of development of a fully fledged capital market in China and an important potential booster of the private sector. Perhaps as important and more pressing, by attracting more funds from investors it may help to mop up the country's excess liquidity and support the government goal of cooling the economy.

Securities regulators hope to open the growth market in the first half of the year, Shang Fulin, the chairman of the China Securities Regulatory Commission said in Beijing on December 17, 2007. Shenzhen Stock Exchange - which is to host the new board - is making every preparation to ensure the smooth launch of the second board, the exchange's general manager Zhang Yujun said in a recent meeting.

Analysts had high expectations for the new board before the recent turbulence of the stock market in line with global trends. The Shanghai Composite Index, in spite of a brief recovery to 5,522 on January 14, has plunged about 27% since the October 16, 2007, historic high of 6,124. It touched 4,490 on Wednesday, the first trading day after the Spring Festival holiday break.

The People's Daily, the Communist Party's flagship newspaper, indicated on Wednesday that the target of establishing the growth market remains intact, with an editorial saying that it was one of two major events expected this year by the securities market, with the other the launch of index futures. The timetable for that has yet to be set, the editorial said.

''The timely launch of the board will push forward China¡¯s economy and stock market,'' the People's Daily said.

Lower thresholds

The growth board, which will have lower thresholds than the main board, is intended to help small start-ups, especially high-growth, high-tech firms, to access funds. Companies in the service, farming, energy and materials sectors are also expected to take advantage of the new board.

According to the latest draft plan, companies to be listed in the board shall have net assets of not less than 20 million yuan (US$2.8 million) with accumulated revenue of no less than 10 million yuan in two consecutive years before listing.

The draft regulation approved by the State Council, China's cabinet, on August 22, 2007, lays legal foundation for the launch 10 years after an initial proposal calling for further development of China¡¯s venture capital was submitted to the central government in 1998.

That proposal was shelved following the burst of the global dot-com bubble in 2000 and the bearish mainland A-share market at the time. In 2004, Shenzhen Stock Exchange launched a small and medium-sized enterprise (SME) board as part of its main board for companies to offer less than 100 million shares in their initial public offerings (IPOs). By the end of 2007, nearly 200 companies were listed, with total market capitalization of 883.6 billion yuan.

A source with the Shenzhen bourse said a first batch of 100 enterprises will be listed in the proposed new board and some 300 candidates are competing to be in the first batch. The plan may be adjusted according to demand in secondary market, he said.

It is expected in the industry that 500 companies will be listed in the first year and that the number of listings will exceed that of the main board (some 1,200) in two years. Wang Shouren, general secretary of Shenzhen Venture Capital Association, has previously said more than 1,000 enterprises intended to be listed in the growth board.

The People's Daily editorial, stating that the "stock market is the barometer of the economy", argued that "the fundamentals of China¡¯s economy are still healthy. Although the economy faces restructuring, its internal momentum for long-term high-speed remains unchanged. Even if China's economic growth slows down a bit, its growth is still remarkable from a global viewpoint. Such high-speed growth and tendency should be the motive power to boost the stock market. Moreover, from annual reports, an absolute majority of listed companies recorded remarkable growth in profits.''

The country's state-owned enterprises posted a 31.6% rise in 2007 total profits, according to the Ministry of Finance, as the economy expanded 11.4%, the fifth consecutive year that GDP has expanded 10% or more.

Slowing growth

China's economic growth, the fastest last year among the world's major economies, may slow to 10% this year, International Monetary Fund managing director Dominique Strauss-Kahn said Friday. The World Bank this month cut its forecast for China's growth to 9.6%.

China is trying to cool the economy as inflation stays close to an 11-year high, even after interest rates were raised six times last year. The government has also steadily increased the minimum reserve ratio of commercial banks to curb lending. Allowing more companies to list shares should drain off cash in a country where residents have few places to park their savings other than banks, real estate and stocks and give small companies seeking funds an alternative to bank loans.

Increasingly affluent Chinese households, which according to the People's Bank of China own about half the country's more than 32 trillion yuan in local and foreign-currency savings, are enthusiastic share buyers, opening more than 25 million new accounts in the first half of last year alone.

In southern Shenzhen, home to the country's smaller stock exchange, director of the municipal technology and information bureau Liu Zhongpu said the bureau will enhance communication with Shenzhen Stock Exchange, to ensure early listing of local companies.

Liu said the exchange will set up a database of listing company resources to include 100 high-growth enterprises and guide and subsidize them for the listing. Shenzhen, part of Guangdong province and a key part in the country's rapid development over the past two decades, has 209,000 private enterprises or 70% of the total business entities.

The bureau made a "creative enterprise growth path scheme" in 2006 to help capitalization of private companies, offering a total subsidy of 3.1 million yuan to each company that is listed in the SME board. So far, it helps 14 Shenzhen corporations listed on the SME board, in addition to three in the US, one in Britain and one in South Korea. The bureau last week the names of five companies it will help to list this year and which are believed will on this occasion target the proposed growth board.

Shenzhen-based Chipsbank Microelectronics Co, Ltd, the world's largest supplier of flash memory controllers, in December said it aimed to list on the growth board, only six months after indicating plans to list on Nasdaq or in Hong Kong.

"Investors in overseas markets such as Nasdaq don't identity with pure Chinese IT companies," Chipsbank president Zhang Hualong told reporters. "The domestic capital market has been leaping forward in the last two years and [Chinese] investors will have passion for a local company like us."

Analysts said other high-tech companies will follow Chipsbank in dropping plans to float overseas and opt instead for the proposed growth board.

Broader benefits

That will bring other local benefits, according to Huang Yun, general secretary of Shenzhen Hi-Tech Industry Association, citing development of the high-tech industry in Shenzhen and the broader Pearl River Delta, already host to clusters of high-tech private companies.

More than 300 companies in Shenzhen alone meet the proposed listing requirement of the growth board, said Huang, citing a survey by his association.

Ba Shusong, a researcher with the State Council Development Research Center, goes further, predicting that a growth board would bring fortunes of more than a hundred million yuan to more than 10,000 business owners in the Pearl Delta if all qualified enterprises in the area were listed.

A bright future was also forecast by Wei Wei, an analyst at Huafu Fund in Shanghai. "We will have our own Google and Amazon in China after the establishment of the growth board. It will have a strong impetus on creative companies thorough market mechanism."

Beyond Shenzhen, securities dealers such as Zhejiang Securities and Changjiang Securities are hunting out potential investment targets in areas such as Chongqing and Zhejiang. In Zhejiang,108 enterprises have submitted listing plans including nine from Yongkang city involved in industries such as auto accessories and chemicals.

China's scores of high-tech industry parks will also be a major source of potential growth board companies. Zhongguancun Science Park, the largest in Beijing, hosts more than 700 enterprises whose annual revenue exceed ten million yuan each, said Dai Wei, director of the administrative office of the park in December. Among the 40,000 enterprises in more than 50 high-tech industry parks, at least 3,000 have annual revenue exceeding ten million yuan, according to official data.

The growth board will also encourage venture capitalists to back more young companies as it will give them a route to cash out from their investments. In Shenzhen alone, 35 new venture capital companies were set up in 2007.

Even so, enthusiasm for the board may be limited in the short term, said Ji Haitao of Shenzhen Capital Group.

"The launch of a domestic growth board means a new exit channel for us but there are other factors influencing the company's choice of listing market," he said. "Before the Shenzhen growth board is launched and accepted by investors, we will mainly help growth enterprises in overseas listings."

Amy Liu, manager of another venture capital in Shenzhen, said the lower threshold of the growth board also meant higher risks for institutional investors. She expects a general decline this year in the price-earnings ratios of A shares and slower economic growth in China, which might discourage institutions from making bold investments in small companies.

"It [the new board] is good news for domestic growth enterprises," Liu said. "As venture capitalists, we have to wait and see. There are already many good overseas markets."