VZCZCXRO9639
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0214/01 1020907
ZNR UUUUU ZZH
R 110907Z APR 08
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 7040
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASH DC

UNCLAS SECTION 01 OF 02 GUANGZHOU 000214 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EAP/CM 
STATE PASS USTR CHINA OFFICE 
 
E.O. 12958: N/A 
TAGS: EFIN ECON CH
SUBJECT: SHENZHEN STOCK EXCHANGE STARTUP BOARD TO OPEN IN AUGUST 
 
¶1. (SBU) Summary: The Shenzhen Stock Exchange's much delayed new 
board for start-up companies should open sometime around the Beijing 
Olympics in August.  The board, which will benefit some smaller 
firms that find it difficult to raise capital due in part to 
Beijing's limits on bank lending, has strict requirements for 
listing companies.  However, some experts believe that the opening 
of the board could be delayed further if market volatility continues 
or as one observer said, in this instance, "the government can wait 
it out."  End summary. 
 
--------------------------- 
Opening Around the Olympics 
--------------------------- 
 
¶2. (SBU) The Shenzhen Stock Exchange may soon get the final go-ahead 
to establish the much delayed new board for start-up companies. 
Wenhua Dai, the Shenzhen Stock Exchange's Deputy General Manager, 
told us March 17 that the new board had received central government 
approval.  After a public comment period, it should be operational 
around the time of the Olympics.  First proposed by the Shenzhen 
Stock Exchange in 2000, the final decision on the timing of the 
board's opening will be made by China's financial regulatory board, 
the Chinese Securities Regulatory Commission (CSRC).  The official 
reason given for the most recent delay was to allow time for public 
comment.  This should take two-to-three months and is one of the 
last steps in a complex approval process. 
 
------------------ 
Financing for SMEs 
------------------ 
 
¶3. (SBU) Jane Wu, the Shenzhen Stock Exchange's deputy director for 
strategy and international relations, explained to us that the new 
board, sometimes called a "NASDAQ-like" board, is intended primarily 
to encourage innovation in the Chinese economy.  It will also 
benefit some smaller firms that are finding it increasingly 
difficult to raise capital in the face of Beijing's efforts to 
control liquidity.  Many smaller companies depend on commercial bank 
loans for financing and have been affected by recent restrictions on 
such lending.  The Shenzhen Stock Exchange already has a Small and 
Medium Enterprises Board, which was established in 2004, but its 
listing requirements are the same as the main board's.  The new 
board should give more small and medium enterprises another option 
for raising capital. 
 
------------------- 
Strict Requirements 
------------------- 
 
¶4. (SBU) Although generally less rigorous than requirements for the 
main board, the Chinese government will set strict limits on the 
types of companies allowed to join the start-up board.  To qualify, 
start-ups must have at least RMB 10 million in profits for two 
consecutive years, or RMB 5 million in profits plus total revenue of 
RMB 50 million in the past year.  (Companies seeking to join the 
main board must show revenues of at least RMB 30 million for three 
consecutive years.)  The CSRC also requires--or "strongly 
encourages"--that companies joining the new board focus on a single 
business sector, preferably some type of innovative technology with 
high growth potential.  The CSRC has discouraged companies whose 
products have long-term research and development requirements from 
listing, fearing they won't produce the best returns for investors, 
Wu said. 
 
¶5. (SBU) Another restriction for the new board is on the number of 
shares made available for trading.  Currently, the main board has a 
100-share minimum for trading.  The start-up board will have a 
300-share minimum.  Also, the lockup period (during which investors 
cannot sell their shares) on the start-up board is shorter: one year 
for investors who come in pre-initial public offering (IPO), and 
three years for the company's founding shareholders.  On the main 
board, an investor's money is locked up for three years without 
exception. 
 
-------------------------------- 
More Volatility, Further Delays? 
-------------------------------- 
 
¶6. (SBU) Some experts say the delays in establishing the new board 
are due in part to current turmoil in financial markets that could 
further postpone its opening.  Wu pointed out that the Chinese 
government keeps tight control on which companies can be listed on 
the main Shenzhen board to preserve the market's value.  When the 
main Shenzhen board opened, one senior official predicted it would 
list 1,000 companies within three years.  However, there are fewer 
than 500 companies listed on the main board, with few prospects of 
 
GUANGZHOU 00000214  002 OF 002 
 
 
significant increases in the near future.  There have been no new 
listings on the main board since 2000.  Wu explained that many 
companies exceed the regulatory requirements for listing, but the 
CSRC cherry-picks the best ones for listing in an attempt to 
guarantee ever-increasing stock prices.  Professor Wu Lifan, a 
finance expert at Guangzhou's Sun Yat-Sen University, told us March 
27 that government officials feel personally responsible for the 
performance of companies they approve to join the stock exchange. 
"It's not a free market," Professor Wu said. "Government officials 
are more concerned with their own stability than market stability." 
 
 
¶7. (SBU) Shenzhen's composite index is down some 30 percent from its 
high for the year in mid-January, but Shenzhen Stock Exchange's Jane 
Wu argued the threat of an American recession would have a limited 
impact on the new board.  She pointed out that overall the Chinese 
market is still fairly insular.  Nevertheless, given the Chinese 
authorities' political concerns about keeping stock prices high, the 
opening of the new start-up board of the Shenzhen Stock Exchange 
could be further delayed until market conditions improve.  Sun 
Yat-Sen University's Professor Wu said the board would likely not 
open while volatile markets have the potential to drive prices down 
and threaten social stability.  "The government can wait it out," he 
said. 
 
GOLDBERG