China is launching a major new stock exchange, this one in the country's capital. Following Xi Jinping's announcement in September, the Beijing Stock Exchange commences operations Monday. Authorities have said the exchange is a "major strategic deployment" that Xi avers will "support the innovation and development of small and medium-sized enterprises." A Protocol analysis of public data about the new exchange shows it's a bit older and less tech-forward than it might sound.
The BSE is China's third equity market aimed at smaller and younger companies, coming 12 years after ChiNext and two years after the STAR Market. How does it compare to the first two, especially STAR, which in the last two years have welcomed companies like Transsion and Semiconductor Manufacturing International Corporation?
Looking at the companies already listed on BSE offers an early answer. The majority of these companies are directly transferred from the Select tier of the National Equities Exchange and Quotations, the Chinese over-the-counter system for trading shares of companies not already listed on Shanghai or Shenzhen's exchanges. Protocol analyzed all 71 companies on NEEQ Select tier, comparing their industry sectors, employee numbers and market caps. (Eleven more companies have been approved for listing and may do so on or before Nov. 15.)
Tech, but 'hard' tech
The data shows BSE companies mostly focus on industries like advanced manufacturing and materials that aren't traditionally considered "tech." Only 22.5% are either software or hardware firms.
The most represented sector: capital goods, with 23.9% of companies, which focus on making engineering, agriculture or aviation equipment. The materials industry takes second place with 15.5%, and the pharmaceutical/biotech industry is third with 11.3%.
Beijing has said BSE aims to serve companies that excel at "Specialization, Refinement, Differentiation, Innovation," (专精特新), a concept first coined by the Ministry of Industry and Information Technology in 2011. It's a vague concept, and what Beijing appears to mean is it wants something different from STAR, which has a clear mandate to serve tech companies.
"What 'specialization, refinement, differentiation and innovation' refers to in China is not directly related to the Internet. It's more about hard tech," Bo Pei, equity research analyst at U.S. Tiger Securities, told Protocol. "For companies in soft tech or applied innovation, [BSE] is not the place for them. It makes more sense for them to choose [a] listing in Hong Kong."
Rule by the old and the small
Companies listed on BSE are significantly smaller than their peers on other exchanges. Of the 71 companies, 32 have a market cap below $250 million, and the median number is $263 million.
Among five companies with a market cap larger than $1 billion, two of them (BTR New Material and Sichuan Changhong New Energy) make batteries, while one (Dalian LINTON Technologies) makes semiconductor parts used in photovoltaics. These three firms have benefited from the recent surge of interest in the new energy industry.
About one-third of listed companies have fewer than 250 employees, putting them squarely in the SME range.
These are the types of companies that are off the radar for anyone outside of China. The minimum market cap for listing on BSE is 200 million RMB (just $31.25 million), whereas the minimum market cap among STAR companies is five times that number.
"Most of [the companies on the STAR Market] are already industry leaders, while the Beijing Stock Exchange is mainly serving small and medium-sized enterprises with some innovative features," said Lerong Lu, senior lecturer in law at King's College London. That makes BSE look like more of a stepping stone for companies before they ascend to the other two markets.
"A small-sized startup should start with listing on NEEQ and ascend through the Base tier and Innovation tier, then list on Beijing Stock Exchange. If they are big enough and meet all the requirements, they can consider transferring to STAR or ChiNext," said equity analyst Bu Naxin.
Ten of the 71 companies on BSE have their headquarters in Beijing. The majority of other companies still concentrate in southern, economically developed provinces, especially those strong in manufacturing like Jiangsu and Guangdong. Surprisingly, there are only three companies from Shanghai, but again this may be related to the emphasis on advanced manufacturing.
In the future, expect more companies from the north to consider listing in BSE, as its establishment had taken into consideration the unbalanced nature of China's financial market. "It will elevate the financial strength of Beijing and northern China, as Shanghai and Yangtze River Delta Area already has the Shanghai Stock Exchange and Great Bay Area has Shenzhen and Hong Kong stock exchanges," Lerong Lu said. "It is a balancing act."