China’s Equity Markets

The Shenzhen stock market

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It seems that nearly every company I speak to in China lately plans to go public in the next year or so. Most are not the Internet or social media companies that are the darlings of stock market investors everywhere. Instead, they are companies with sales as little as RMB 300 million ($46 million) that, more often than not, operate in traditional manufacturing industries.

Outside of China, it would be difficult for companies of this size and operating in basic industries to list, no matter how fast they are growing. Investors just aren’t interested in small or mid-cap manufacturing companies. In China, however, it’s different. Machinery, metals, petrochemical, pharmaceutical and electronics companies of all sizes are taking advantage of China’s developing equity markets and are listing their shares.

A vibrant equity capital market that circulates an economy’s capital and gets much-needed funds into the hands of companies and individuals that can use them most effectively can be an important tool to any country’s economic development. Bank and other types of debt financing have their place, but loans have to be repaid, so borrowed funds must be invested conservatively. Equity, on the other hand, represents risk capital that can be used to innovate and develop new products and technologies. China’s equity markets are now developing to the point where they are becoming an important source of risk capital for young, fast growing companies in all types of industries.

In 2010, a total of 321 companies went public on Shenzhen’s SME and ChiNext (GEM) boards, raising a total of nearly RMB 300 billion ($46 billion) in funds. The number of companies that listed was more than three times the 90 companies that listed in 2009, and the capital raised was almost five times the RMB 62.8 billion ($9.7 billion) that was raised in the previous year. An additional 131 companies have already listed on either the SME or the ChiNext Board in 2011.

The first stock exchange in China was established in Shanghai in 1904, only to close in 1949 when the People’s Republic of China was founded. As part of China’s economic reform program, the Shanghai Stock Exchange was re-established in 1990, and a new exchange was set up in Shenzhen at the same time. The 914 companies that are now listed on the Shanghai Stock Exchange have a total market capitalization of RMB 17.7 trillion and trade at an average of 16.1 times earnings. On Shenzhen’s main board, the 1,299 listed companies have a total stock market value of RMB 7.9 trillion and trade at an average price to earnings ratio of 29 times.

The main boards of the Shanghai and Shenzhen stock exchanges, however, have been primarily focused on providing listing venues for China’s large, state-owned companies, and have not been available to the country’s many small and medium-sized enterprises. With the growth of China’s private sector, and the general difficulties that small and medium-sized companies face when trying to access capital in China, the need for separate boards to serve their needs became increasingly apparent.

In order to help China’s smaller growth companies raise capital, the SME Board of the Shenzhen Stock Exchange was established in June 2004. The ChiNext Board, also part of the Shenzhen Stock Exchange, was launched in October 2009 as China’s answer to NASDAQ to enable emerging, innovative companies to raise money to bolster their growth.

The SME board now has 588 listed companies with a total market value of RMB 3.1 trillion that trade at an average price earnings multiple of 34.7 times. The 227 companies listed on ChiNext have a total market value of RMB 717.1 billion and trade at an average 42.2 times earnings. With their emphasis on smaller, fast-growing private companies, the SME and the ChiNext boards have become the centers of IPO activity in China.

All told, China now has 3,028 listed companies with a total market capitalization of RMB 29.4 trillion ($4.5 trillion). By comparison, over 5,000 companies are listed on the New York Stock Exchange and NASDAQ in the United States, and have a total market capitalization of $18.1 trillion.

With the development of the SME and the ChiNext boards in Shenzhen, China’s stock market is fast becoming a viable funding source for the small and medium-sized enterprises that drive the growth of any economy. Just as the U.S. stock market played a vital role in the development of the American economy, so too will China’s stock market provide another growth driver for the country’s economy.

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