The China Securities Regulatory Commission (CSRC), the country's securities watchdog, on Monday approved the establishment of a small and medium-sized enterprise (SME) board on the Shenzhen Stock Exchange.

The SME board, the beginning of a long-expected second board market, will operate as a special sub-board of the main Shenzhen board and cater to small- and medium-cap stocks. However, it will run somewhat independently, with its own index, trade code and supervision system, according to a CSRC press release.

CSRC approval came on the heels of permission from the State Council.

Authorities also accepted rules designed by the Shenzhen exchange on the issuing, trading and supervision systems of the SME board. That is a substantial first step towards the development of an entirely independent second board market, a CSRC spokesman said.

The step-by-step approach is expected to help the exchange and regulators better prepare for higher risk-control requirements.

As early as 2000, Shenzhen had planned to launch a NASDAQ-style second board market and suspended initial public offerings on the main board to prepare for the new market. But the slump of similar markets overseas and the bursting of the tech-stock bubble made Chinese authorities wary of speculation and risk.

The plan was temporarily shelved, but was raised again this year in a guideline document of the State Council on the development of the capital market.

Launching the SME board would enrich China's capital market, which has been expanding rapidly but still has a rather simple structure, the CSRC spokesman said. It would also help SMEs obtain more funding.

The board is intended not to cover only tech firms or start-ups, but a wider range of stocks.

The present threshold for listings will remain the same. But to strengthen risk control, regulators will introduce some special trading rules and enhance disclosure requirements and auditing of the fund application for the SME stocks.

Neither CSRC nor the Shenzhen Stock Exchange said when new IPOs would start, but most insiders believe it will happen very soon.

An investment banking source said many SMEs had lined up in front of the exchange on the expectation of an immediate resumption of IPOs.

However, some investors also worry that the resumption of IPOs in Shenzhen would lead to a fast market expansion that would divert some funds from existing stocks.

The CSRC spokesman said authorities would try to keep the pace of new listings in line with market capacity to maintain stability.

(China Daily May 18, 2004)