21 June 2019

POLICY WATCH: Turning on OTC funding taps for SME expansion

First came the decision in November to restart initial public offerings after a year-plus freeze brought on by a lack of investor confidence. Now the central government has sent word that it will expand the over-the-counter market to let China’s small and medium-sized enterprises raise funds.

It’s all part of an effort to ease funding pressures for SMEs and underpin economic growth. It indicates an official push to streamline fundraising channels for smaller businesses, a central pillar of the nation’s economy.

The State Council announced via a statement on its website on Dec. 13 that the OTC market, a national share transfer system for SMEs also known as the New Third Board, will be broadened to cover all innovative and promising companies across the nation.

Under existing rules, only unlisted firms in high-tech zones in four cities are eligible to raise funds through the board, officially called the National Equities Exchange and Quotations System. But the new rules will allow all companies with 200 or fewer shareholders to do so. Institutional investors, particularly brokerages, insurance companies, investment funds and foreign funds, will be encouraged to take part.

Some companies will also be able to apply to list on the board for public share transfers so they can raise funds through equity and bond financing as well as asset restructuring, according to the statement.

The board was launched in 2006 as a pilot scheme to allow non-listed small, promising high-tech enterprises in Beijing’s Zhongguancun Science Park transfer shares and raise funds for specific purposes. The scheme was later expanded to cover several high-tech zones in Shanghai, Wuhan and Tianjin. As of the end of 2012, around 200 companies traded on the board.

But that year, transactions on the board fell 22.8 percent from 2011, and the average funding per firm came in at only 33.8 million yuan (US$5.53 million), well short of the amount needed for China’s funds-starved SMEs. The transactions declined because of weak market sentiment, the sluggish economy and the lack of attractive projects to lure investors.

Whether those transactions increase depends on market sentiment but at least it will establish a comprehensive fundraising platform for SMEs. China has been trying to expand funding support for SMEs, which are usually too small to list but at the same time too risky for Chinese banks to finance.

Analysts say that regulatory limits and a lack of investor interest have held back initiatives such as OTC exchanges and high-yield bonds designed for use by smaller companies, and efforts to force banks to lend to SMEs have mostly failed as banks need fixed assets to guarantee loans.

Banks have also refused to loan money to SMEs without a sustainable business model, stopping funding from the banking system from penetrating the real economy and creating bottlenecks for economic growth.

-- Contact the reporter at [email protected]


EJ Insight writer

EJI Weekly Newsletter

Please click here to unsubscribe