At the end of May, the government announced the long-awaited stratification system for the New Third Board, China's over-the-counter stock board. Although the system has been well received, some companies have worried that failing to qualify for the higher "innovation" stratum will leave them out in the cold.
Over the last two weeks, many domestic securities companies and investment institutions have felt the excitement surrounding China's New Third Board, thanks to the recently announced stratification system, which has caused many to describe the over-the-counter exchange as a Chinese version of the NASDAQ.
But coming back from the Dragon Boat Festival, many might feel less optimistic about the New Third Board's prospects as data showed that two major indexes for the New Third Board fell last week, with one hitting a new low for the year.
Investors probably didn't see it coming. After all, it was just two weeks ago that many were jumping for joy over the launch of the long-awaited stratification system.
A board divided
The National Equities Exchange and Quotations (NEEQ), which runs the New Third Board, on May 27 announced profitability, growth and liquidity requirements for companies to qualify for the over-the-counter stock market's "innovation layer."
The new regulation will take effect on June 27.
Around 1,060 companies, or about 14 percent of the more than 7,000 companies listed on the New Third Board, will qualify, the China Business Journal newspaper reported Sunday.
The companies that will make the cut have a total market capitalization of about 1.1 trillion yuan ($167.75 billion).
"The stratification scheme is a major positive to China's New Third Board," said Wang Lisong, secretary general of Beijing-based New Third Board Entrepreneur Alliance.
Qualifying for the innovation layer may sound like meaningless distinction, but it will in effect serve as a government stamp of approval, which Wang said will garner investor interest and encourage more trading.
"This will drive the New Third Board as a whole," Wang told the Global Times on Saturday.
Of course, if 14 percent of the companies on the New Third Board qualify for the innovation layer, that means 86 percent or so won't make the cut. Under NEEQ's rules, this group of company will be relegated to the "basic layer."
"Companies relegated to the basic layer will have to try to improve their finances and corporate governance to meet the standards of the innovation layer, which should help improve the quality of the companies listed on the New Third Board," Wang said.
A CFO of a financial company listed on the New Third Board, who preferred to be unnamed, agreed with Wang, saying the rules can improve liquidity on the board.
Trading on the New Third Board has been sluggish of late. On February 29, the Economic Daily reported that 2,895 companies on the New Third Board had not traded in 2015.
The total financing amount on the board was 12.12 billion yuan in March and 12 billion yuan in April, NEEQ data showed, compared with hundreds of billions of yuan in transactions that take place on the Shanghai and Shenzhen exchanges each day.
Second-class companies
Although market experts acknowledged that stratification could help attract investment funds from the main boards, many have criticized the system for leaving companies at the basic layer out in the cold.
The CFO of the financial company expressed his concerns that companies in the basic layer will be treated differently than their peers that qualify for the innovation layer.
"The treatment of companies at the different layers will be worlds apart, especially in valuation," he said.
"More funds will flow into the innovation layer. The thinking is that these are higher quality companies, so they will trade more frequently. But that means almost nothing will be left over for companies at the basic layer."
The CFO also expressed dissatisfaction with industry restrictions. According to the announcement posted on NEEQ's website on May 27, various financial companies including financing guarantee companies, small loan companies, Internet finance companies, financial leasing companies and pawn brokers could not qualify for the innovation layer.
A chairman of a New Third Board-listed financial company, who requested anonymity, told the Global Times on Wednesday that the regulator imposed the prohibition on finance companies because there have been so many cases of fraud among peer-to-peer (P2P) lending platforms, causing great losses to investors.
He pointed out that no industry is risk free, and banning financial companies is a one-size-fits-all policy.
The chairman also said that his company's share price has fallen more than 20 percent since the announcement.
"But in fact, my company has done very well in our core business this year," he said.
The CFO noted that being excluded from the innovation layer due to industry restrictions rather than financial indicators is unfair and will hurt both the companies and their investors.
"It will damage a company's valuation, image and credibility, cause its stock price to plunge and make refinancing much more difficult," he said.
"In addition, investors, both individual and institutional investors, have suffered unintended financial losses just because of policy factors."
The CFO pointed out that all financial companies should not pay the price for the problems caused by private equity and P2P lenders.
"As a mature industry that has existed for more than 20 years, financial companies are different from the emerging P2P companies. We have been strictly supervised by the China Banking Regulatory Commission," the CFO said.
"Besides, financial companies, as a government-supported industry, have provided a large amount of financing to small and medium-sized enterprises (SME) in the past, contributing a lot to China's real economy," the chairman noted.
China's financing guarantee companies had provided loans to 230,000 SMEs by the end of 2013, sohu.com reported on January 29.
Wang defended the regulator of the New Third Board. "The regulator may worry about the operating risks of these financial companies in an economic downturn," he said.
The chairman nevertheless noted that financial companies, as activists on the New Third Board, have caused a "catfish effect."
"The lack of participation of financial companies will lead to a sluggish market on the New Third Board, especially considering that nearly one-third of the companies listed on the NASDAQ are in finance."
