Challenges arising from China’s Science and Technology Innovation Board

[NOTE: THIS PAPER IS NOT CONSTRUED TO PROVIDE AND SHOULD NOT BE CONSIDERED AS LEGAL ADVICE ON THE CHINESE LEGAL SYSTEM]

Abstract

The Shanghai Stock Exchange recently launched its new Science and Technology Innovation Board (“Sci-tech Board”), a board similar to Nasdaq in the US and focused in fast-growing companies to raise capital under simpler and more market-driven rules as to the ones currently in place in the main boards of the Shanghai and Shenzhen stock exchanges. Companies that apply for listing within the Sci-tech Board shall not be subject to the China Securities Regulatory Commission’s (CSRC) vetting process and shall rather be bound by the technology innovation board’s disclosure requirements as to whether the information provided in the applicant’s prospectus is real. This shift from an approval-based system to a disclosure-based regime with minimal regulatory intervention should not only be able to solve the long queue for initial public offering applications but also reduce the enormous volume of capital outflows resulting from listings in Hong Kong and the US.

However, China’s IPO reform should be treated as a double-edged sword; with the absence of regulatory IPO screenings and the subsequent increase in the total number of IPOs, China’s already highly speculative and volatile market could turn out to be an unpleasant venue for investors to allocate their funds.

Following this line of thought, Section 1 of this research paper provides an overview of the key rules for Chinese start-ups to list their shares in the Sci-tech Board, while Section 2 outlines some of the challenges Chinese securities regulators may face as a result of their decision to adopt looser share listing requirements in Shanghai. Section 3 concludes.

Keywords: China, capital markets, Science and Technology Innovation Board, Shanghai Stock Exchange.

Contents

Abstract

Challenges arising from China’s Science and Technology Innovation Board.

1.    Sci-tech Board’s listing requirements.

           1.1. Basic principles and requirements

           1.2. The new disclosure-based review process

           1.3. Responsibility over the information disclosed in the application documents

           1.4. Listing standards

2.    Challenges arising from Sci-tech Board’s looser listing requirements.

           2.1. Effects of capital market deregulation

           2.2. Sci-tech Board and investor risk

           2.3. Effects of Sci-tech Board's launch in other Chinese bourses

3.    Conclusion.

References.

Challenges arising from China’s Science and Technology Innovation Board

Following announcements made by President Xi Jinping last year[1], the China Securities Regulatory Commission’s (CSRC) and the Shanghai Stock Exchange (SSE) recently issued several rules and guidelines to regulate the functioning of SSE’s new Science and Technology Innovation Board (“Sci-tech Board”) - a board similar to Nasdaq in the US, focused in fast-growing companies to raise capital under simpler and more market-driven rules as to the ones currently in place in the main boards of the SSE and the Shenzhen Stock Exchange (SZSE)[2] -, among which worth noting the Measures for the Administration of the Registration of IPO Stocks on the Sci-tech Board (for Trial Implementation), issued by the CSRC on March 1, 2019, to establish the framework for share listing and depositary receipt applications within the new board (“CSRC Measures on Sci-tech Board Listing”), and the Rules Governing Review of the Issuance and Listing of Stocks on the Sci-tech Board, issued by the SSE on March 1, 2019, which, despite replicating most of the rules included in the CSRC Measures on Sci-tech Board Listing, provides further details to certain sections included therein (“SSE Rules on Sci-tech Board Listing”). The key provisions are described below.

1.     Sci-tech Board’s listing requirements

1.1. Basic principles and requirements

As the name suggests, the establishment of the Sci-tech Board is intended to facilitate funding access to technology-oriented companies. Therefore, priority is given to IPO applications from Chinese companies possessing key technologies or prominent scientific and technological innovation capabilities[3]. Following CSRC’s investor rights protection principles, priority shall also be given to those IPO candidates with a stable business mode, a great growth potential and a high market reputation[4]. Basic formal requirements include issuers to be incorporated as a joint stock company, a minimum 3-year period of business activities[5], as well as formal approvals by the issuer’s board of directors and shareholders’ meeting[6].

1.2. The new disclosure-based review process

Companies that apply for listing within the Sci-tech Board shall not be subject to the CSRC’s vetting process - where such regulatory authority approves (or rejects) applications based on its assessment of the applicant’s underlying business and financial health[7] - but shall rather be bound by the Sci-tech Board’s disclosure requirements as to whether the information provided in the applicant’s prospectus is real[8]. In this sense, applications to list in the Sci-tech Board must go through a 3-tier review process within the SSE in order to be approved, and such review process, once completed, must be validated by the CSRC. The first step consists of a preliminary review of the application documents by the Sci-tech Board’s Review Body; at this stage the Review Body may raise inquiries to the issuer’s sponsor and conduct on-site inspections to verify the quality of the information disclosed by the issuer[9]. If no further inquiries are needed, the Review Body issues a report in favor of the share listing or stating its decision to terminate its review[10]. In case of a favorable report, said report and the issuer’s application documents are then submitted to the board’s Listing Committee for deliberation, whom shall review such documents, conduct further inquiries with the issuer and sponsor if needed, and convene in meeting whether it should issue an opinion approving or disapproving the issuance and listing[11]. Considering the review opinions issued by the Listing Committee, the SSE shall then issue a final report to approve or terminate the issuance review[12]. Finally, if the application documents pass the SSE’s review process, the relevant review materials and the issuer’s application documents are sent to the CSRC, who may either request the SSE to conduct supplementary reviews or approve the public offering of issuer’s shares[13].

Worth mentioning that the SSE has a statutory obligation to carry out its review process and issue the final report within 3 months counted from acceptance of the application documents by the SSE[14], while the CSRC has 20 business days to approve (or disapprove) the share listing[15]. Therefore, these statutory deadlines, along with the new disclosure-based regime, should be able to avoid the long queue for IPO applications in the SSE and SZSE’s main boards, where reports state it reached a peak of more than 900 companies waiting for listing approval in 2016, with an average waiting time of 2 years[16].

1.3. Responsibility over the information disclosed in the application documents

In the context of the Sci-tech Board, the SSE’s duty is to check whether the information provided in the application documents are truthful, accurate and complete, with the caveat that it does not guarantee the authenticity, accuracy nor completeness of the information disclosed[17]. In other words, when reviewing the information submitted by the share listing candidate, the SSE will verify whether the disclosed documents contain information that has a significant impact on investors’ investment decisions and whether the degree of disclosure is enough for investors to make informed decisions. For instance, the SSE shall verify if the application documents are clear and easy for an ordinary investor to understand, whether it fully discloses the issuer’s business, technology, finance, corporate governance and all factors that may adversely affect the issuer’s operating and financial conditions[18], or if the share listing candidate and/or its controlling shareholder were ever convicted (or are subject to official investigation) for corruption, bribery or other major violation of law involving, for instance, information disclosure, national security, environmental law, work safety or public health[19]. However, like international practices, the responsibility over the authenticity, accuracy and completeness of the application documents does not lie with the SSE, but rather with the issuer and its controlling shareholder, de facto controller and management[20]. Professionals engaged to assist in the IPO process also have their share of responsibility and can be held liable for the integrity of the documents they produce and any other information relating to their professional duties[21], with emphasis given to the issuer’s IPO sponsor.

Similar to other markets like Hong Kong, where sponsors play a crucial role in an IPO[22], sponsors operating in the Sci-tech Board must fully understand the issuer’s business operation and risks and conduct a thorough verification of the application documents in order to attest before the SSE that the issuer meets all listing conditions, as they can also be held liable for the information provided in the prospectus[23]. Moreover, sponsors to a listing application submitted to the Sci-tech Board are also required to hold between 2% and 5% of the shares issued by their clients for at least 2 years, with a cap on such investment of RMB 1 billion, an obligation unheard of in other markets[24].

1.4. Listing standards

The key share listing (and depositary receipt issuance) requirement is set forth in Articles 22 to 24 of the SSE Rules on Sci-tech Board Listing - which, differently from other Chinese bourses like SZSE’s ChiNext board where certain financial thresholds aimed at issuer’s profitability, assets and share capital are imposed[25] -, introduced more relaxed standards focused primarily on an issuer’s forecast of its market value. Depending on its development stage and corporate governance characteristics, an issuer can opt between 3 different levels of listing standards, namely (i) a “generic” listing standard, (ii) a standard applicable to Red Chip companies[26] not yet listed overseas or (iii) a standard intended for issuers with weighted voting rights. As a general rule, while the “generic” listing standard contains stricter requirements by combining expected market value thresholds with high net income, revenue, net cash flow and/or R&D expenditure thresholds[27], the other 2 listing standards are more flexible and allow issuers to apply for share listing if they meet the estimated market value thresholds envisaged for each of such listing standards[28].

In this context, if an issuer falls within the definition of a Red Chip company (and has not gone public in other countries) or issued different types of shares with weighted voting rights in favor of small groups and company founders, the natural tendency is for said issuer to choose one of the looser listing standards when submitting its IPO application to the SSE. In other words, issuers may feel tempted to structure their IPOs using foreign investment vehicles or weighted voting rights to prevent higher listing requirements and focus their efforts in convincing securities regulators that their businesses possess innovative technologies, are experiencing rapid growth and are therefore able to reach a market value forecast in line with regulatory requirements.

These loosened requirements also mean unprofitable companies (or those with uncovered accumulated losses) are still able to apply for IPOs if the causes leading to, the effects resulting from and future changes to such financial standing are disclosed. In terms of mandatory disclosure, unprofitable issuers must state, for instance, that their unprofitability results from occasional or frequent factors like key products still under research and development stage, products that have not yet passed promotion phase (and therefore have still not gained extensive popularity in the market), or even absence of scale effect caused by low sales and high costs[29]. Unprofitable issuers are also required to disclose enough details on the effects of its unprofitability in aspects such as company’s cash flow, business development, R&D expenditures or sustainability of production and operation[30]. In addition, unprofitable issuers must not only analyze and disclose information about the direction its financial position may take - development trends of R&D and level its business must reach to balance its books, for example -, but must also divulge relevant risk factors and implement measures to protect investor rights and interests[31].

Although this new market-oriented approach has great potential to facilitate tech companies to access funding, the following sections explain that changing China’s long-established approval-based regime to a more streamlined process has its challenges and should therefore be treated with caution.

2.     Challenges arising from Sci-tech Board’s looser listing requirements

2.1. Effects of capital market deregulation

A substantial amount of literature on the relation between deregulation and volatility of the stock market in emerging economies has been published over the past years, with different conclusions reached so far. On one hand, neo-classical economists such as Spyros Spyrou and Konstantino Kassimitis believe that financial liberalization leads to reduction in stock market volatility[32]. In this sense, Vincent Reinhart suggests that if investors have higher chances to adjust the quantity of their portfolios in response to shocks, the less impact there should be on share prices, and hence volatility should fall[33], while Saikat Bhattacharyya understands that liberalization is not the cause of volatility of the stock market, but rather the quality of market information[34]. Nonetheless, such arguments should be interpreted with caution as fewer restrictions may not be the solution to tackle stock market volatility. According to Joseph Stiglitz, although portfolio diversification is achieved through the opening of capital markets, such openness does not lead to less volatility, but is rather associated with greater instability[35]. In other words, while openness increases the volume of capital flows, the procyclical nature of capital flows exacerbates economic fluctuations (when they do not actually cause them)[36]. With respect to Bhattacharyya’s line of thought, considering that quality of market information is usually associated with lack of transparency, Stiglitz notes that the role of transparency in enhancing economic stability should be questioned in light of what was observed in the latest major set of financial crises, that is, countries with high transparency levels (such as Norway, Sweden and Finland) were also affected by those crises[37].

Contrary to the neo-classical view, post-Keynesian economists defend that liberalization in emerging economies introduces volatility into the economy[38]. William Miles understands that, even though results of reforms depend on individual country circumstances, there is a higher tendency for liberalization to increase the volatility of stock returns[39]. In this same line of thought, Wei Huang argues that, although deregulation is positively associated with a decrease in the aggregate cost of equity capital and in the short-term it enables markets to become more informationally efficient, this improved efficiency leads to higher volatility as quicker access to relevant information causes share prices to go up or down faster[40]. Capital market liberalization also causes countries to become more sensitive to oscillations in sentiment arising not only from changes made at a domestic level - corporate tax rates or interest rates, for instance - but also from shifts in economic circumstances outside the country, thus preventing governments to pursue their economic policies[41]. Take Hong Kong and Taiwan for instance, whose open markets suffered from sharp selling as mutual funds sought cash for redemptions during the Asian financial crisis of 1997, while China underwent little stock market volatility due to its tight control on capital[42]. Another more vivid example is the 2008 global financial crisis, which affected many countries simultaneously and led to a crisis unseen since the Great Depression, while China was not only able to maintain a robust growth, but also managed to pursue countercyclical macro-policies and stave off a recession because its then existing capital account restrictions provided the country some room to maneuver[43].

Notwithstanding the arguments provided above, adoption of more liberal policies may still be appealing to some governments as they attract foreign direct investment (FDI) and its corresponding benefits, namely technology, access to markets and improvements in corporate governance and human capital[44]. However, liberalization should not be viewed as the sole answer to encourage FDI. Take China once again as example, which has consistently imposed tight controls on short-term capital, but nevertheless managed to provide a hospitable environment for FDI[45].

The lesson to be taken from the existing literature is that, because the relation between openness and stock market volatility is controversial among economists - especially since different methods, samples and dates were employed in existing studies[46] -, a prudent approach should be taken towards capital market liberalization[47]. In China’s case, considering the usefulness of its well-known financial repression model during global economic downturns, initiatives focused in increasing and/or facilitating foreign investors’ ability to invest in the country, such as the possibility for Chinese tech companies to use the Sci-tech Board as platform for depositary receipt issuance, should be treated with caution. In fact, Chinese policymakers seem to be treating capital market liberalization prudently; the approach towards the adoption of a disclosure-based regime in a regional level - i.e., the Sci-tech Board - followed by a gradual implementation in a national level - i.e., the SSE and SZSE’s main boards - if such regulatory model proves to be successful[48] indicate that Chinese authorities remain conscious of the risks inherent to capital market liberalization.

2.2. Sci-tech Board and investor risk

It is self-evident that looser listing requirements have potential to increase investors’ risk, especially in China, where Chinese companies[49] are known to have a higher incidence of corporate fraud and greater fraud severity[50]. To understand the seriousness of this bitter statement, let us have a glimpse at how Chinese companies with shares cross-listed in other matured markets perform. One may assume that more developed markets such as the US and Hong Kong would not only be able to drive away Chinese companies prone to corporate fraud from cross-listing in their respective bourses, but also prevent those that succeed in cross-listing their shares to commit fraudulent activities. This is not the case. More than one-third of mainland Chinese issuers listed in Nasdaq and the New York Stock Exchange - two of the most popular listing venues among Chinese companies - are reported to be involved in corporate fraud scandals[51]. Also, the Hong Kong Stock Exchange (HKEx), the largest offshore listing venue for mainland Chinese issuers[52], experienced corporate fraud cases such as the Hontex International scandal, the shortest traded firm on HKEx before its shares were suspended after being found that the company provided misleading information in its prospectus; as a result, the High Court rendered a landmark decision for the Chinese company to pay more than HKD 1 billion back to investors who purchased its shares[53]. HKEx also learned unfortunate lessons with the multi-million-dollar fraud and subsequent collapse of the Guangnan group, compared by scholars as the equivalent to the Enron case in the US, in which top-tier management and numerous connected persons were found guilty of profit inflation, conspiracy to defraud and embezzlement[54]. Another scandal worth mentioning is the imprisonment of Skyworth Digital’s founding chairman and brother for the theft of HKD 70 million in cash and stock options from their listed company - a financially sound company highly praised by fund managers - to cover up losses suffered from their personal real estate investments[55].

The existence of corporate fraud cases in other more developed markets not only reveals their potential regulatory gaps, but, more importantly, demonstrates that even well-established capital markets (and legal systems) are also unable to prevent companies listed in their bourses to carry out fraudulent activities. Therefore, considering Chinese companies’ tendency to commit fraudulent acts of a higher severity, there is a legitimate concern that the Sci-tech Board’s loosened listing requirements can inflate the probabilities of investors being defrauded. In this sense, with the total number of IPOs likely to increase due to lower listing thresholds - 79 companies already submitted their share listing applications since the launch of the tech board 2 months ago[56] -, the quality of broker research coverage tends to decline as less resources will be spent in researching a single firm’s investment value (and risks), thus undermining the ability of investors to thoroughly assess their target companies[57].

Nonetheless, Chinese securities regulators seem to be aware of this hazard if considered the risk control mechanisms recently announced by the SSE, such as the requirement imposed on sponsors to invest in their clients’ IPOs, which not only can be viewed as an “endorsement” from sponsors - and therefore add a safety measure to investment decisions -, but also prompts brokerages to be more conservative and choose those companies that are truly qualified for an IPO[58]. Another noteworthy safety measure adopted by Chinese regulators that should keep irrational and impulsive retail investors under control refers to the requirements for these investors to directly invest in shares listed in the Sci-tech Board, where individual investors must prove a daily average balance of at least RMB 500,000 in their securities trading accounts and at least 2 years of experience in securities trading; those who fail to meet these strict requirements are encouraged to purchase shares through mutual funds duly authorized to operate in the new tech board[59].

2.3. Effects of Sci-tech Board’s launch in other Chinese bourses

The idea of establishing a board to foster the development of fast-growing companies is not something new in China. For instance, the SZSE adopted a similar approach in 2009 with the launch of ChiNext, a board for exchange of shares issued by Chinese technology firms also resembling Nasdaq due to its less strict listing requirements, and, more importantly, focused in promoting the growth of the venture capital industry in the country[60]. While ChiNext has proved to be an invaluable capital raising platform - as at April 1, 2019, 749 companies were listed in such board, with an aggregate market value of more than RMB 5.6 trillion[61] -, there is literature suggesting that SZSE’s technology board has not fully succeeded in avoiding Chinese companies going public in other jurisdictions because it still is not market-oriented, but is rather a relaxed alternative to the existing approval-based regime[62]. Among the reasons Chinese companies avoid ChiNext, Gü?bilmez notes that the listing requirements of such board are still too stringent for smaller companies, hence why many of these companies still prefer listing in Nasdaq[63]. In this sense, profitability requirements imposed by the CSRC, such as the need for an issuer to have a cumulative net profit of at least RMB 10 million in the past 2 years and net assets of at least RMB 20 million[64], are a key determinant of the IPO location[65].

The SZSE is (apparently) working to relax ChiNext’s listing requirements; however, the Sci-tech Board’s launch could be a concern to ChiNext’s competitiveness and therefore potentially result in the SSE and SZSE battling against each other to attract start-ups by continuously reducing their listing requirements[66]. With more financing channels available in China’s stock exchanges and loosened listing thresholds in these new channels, the overall quality of companies listed therein tends to decrease, which in turn raises underwriter and sponsor’s responsibility to determine the value of an issuer’s shares and confirm if the issuer complies with all listing conditions, respectively. This is particularly relevant when considering that underwriter and sponsor fees represent a sizeable portion of the issuing cost - in China, issuing costs are generally set between 5% to 8%[67] of the IPO proceeds; in the US, underwriter fees alone represent 7% of the gross proceeds[68]. On top of that, given the uncertainties about the success of new IPOs in new markets such as the Sci-tech Board and ChiNext, securities services providers who put their reputation at stake when taking firms public - and, in the case of a Sci-tech Board sponsor, who invests their own money in shares issued by their clients - could demand a higher percentage gross spread as compensation for the higher risk they are undertaking[69]. With increased issuing costs, domestic bourses like ChiNext and the Sci-tech Board could gradually lose their attractiveness as the dispute for the title of most market-oriented board tightens[70].

3.     Conclusion

China’s gradual shift from an approval-based system to a disclosure-based regime with minimal regulatory intervention is clearly one of the country’s many initiatives implemented in the last few years to address a long-established concern among policymakers, that is, the absence of market participation in funding the country’s economy - which, as we know, has relied on state-owned banks for decades. To do so, the Sci-tech Board introduces more market-driven rules that are less onerous and more efficient for start-ups to access funding, hence these new set of rules should reduce the enormous volume of capital outflows resulting from listings in other markets, especially those in Hong Kong and the US[71].

However, China’s IPO reform should be treated as a double-edged sword; the country’s already highly speculative and volatile market could become even worse if post-Keynesian theories - i.e., capital market liberalization introduces volatility into the economy - turn out to be applicable in China’s case. In theory, with looser controls on capital resulting in more opportunities for foreigners to invest in the country and absence of regulatory screenings leading to increase in the total number of IPOs, China could indeed be more susceptible to global financial crises in the future. From a domestic perspective, the Sci-tech Board will certainly attract companies considered high-risk investments - such as start-ups and pre-revenue biotech firms -, whom, although compliant with the new disclosure rules, may have a value that is difficult to assess from an investor perspective[72]. Also, the Sci-tech’s Board’s looser listing thresholds could backfire on the Chinese regulators’ efforts to provide funding alternatives for tech start-ups in a sense that higher risks of fraud in the stock market can cause a widespread unease amongst investors. In this context, competition between China’s bourses to attract companies wishing to list their shares and the corresponding increase in the securities service providers’ responsibility to implement an IPO could also end up delivering an opposite result from the one intended: Chinese companies listing overseas to avoid substantial issuing costs.

China seems to be aware of the risks inherent to its newly adopted market-driven approach and has adopted mechanisms to counter them in order to protect its “army” of retail investors. From an issuer’s perspective, the requirement for sponsors to invest in as much as 5% of the shares issued by their clients not only restricts the sponsor business to those better structured service providers but, more importantly, should curb those companies fated to fail from going public. Also, imposing strict requirements for retail investors to directly invest in shares listed in the Sci-tech Board mitigates the risk of retail investors making bad investment decisions based on poor quality research on a listed company’s investment value and risks. It seems that Chinese regulators have taken the best approach towards its radical shift from a lengthy and cumbersome IPO process to a more streamlined version, that is, using the Sci-tech Board as a regulatory test case for future implementation of its disclosure-based regime in a national level, which is consistent with China’s gradualist style of economic reforms that has proven to be successful in the past, where changes are carried out on a trial-and-error basis.

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[1] Bloomberg News. (2019, April 16). China Says IPO Sponsors on New Tech Board Must Invest in Deals. Retrieved April 23, 2019, from https://www.bloomberg.com/news/articles/2019-04-16/china-says-ipo-sponsors-must-invest-in-companies-on-tech-board.

[2] For instance, the various measures and guidelines issued by SSE, such as the (i) Measures for the Administration of the Listing Committee for Stocks on the Sci-tech Innovation Board, (ii) Implementation Measures for the Issuance and Underwriting of Stocks on the Sci-tech Innovation Board, (iii) Guidelines for the Recommendation for the Listing of Enterprises on the Sci-tech Innovation Board, (iv) Guidelines for the Content and Format of the Sponsorship Letter for Listing on the Sci-tech Innovation Board, and (v) Guidelines for Acceptance of Application Documents for the Issuance and Listing of Stock on the Sci-tech Innovation Board, all of them issued on March 1, 2019.

[3] China Securities Regulatory Commission. (2019, March 1). Measures for the Administration of the Registration of IPO Stocks on the Science and Technology Innovation Board (for Trial Implementation), Chapter I, Article 3, and Shanghai Stock Exchange. (2019a, March 1). Notice by the Shanghai Stock Exchange of Issuing the Rules of the Shanghai Stock Exchange Governing Review of the Issuance and Listing of Stocks on the Sci-tech Innovation Board, Chapter I, Article 3.

[4] Id.

[5] CSRC (2019), supra note 3, at Chapter II, Article 10. In case of limited liability companies transformed into joint stock companies, the period in which the company conducted its operations under the limited liability form is also counted.

[6] CSRC (2019), supra note 3, at Chapter III, Articles 14 and 15. Other requirements apply for companies wishing to issue depositary receipts e.g. issuer must be a Red Chip company with (i) market capitalization of at least RMB 200 billion, if it falls under the definition of large-sized company and is listed overseas, or (ii) operating income of the previous year of at least RMB 3 billion and a value of at least RMB 20 billion, if it falls under the definition of innovative company and is not yet listed overseas (General Office of the State Council. (2018, March 22). Notice of the General Office of the State Council on Forwarding the Several Opinions of the China Securities Regulatory Commission on Launching the Pilot Program of Innovative Enterprises Domestically Issuing Stocks or Depository Receipts, Section III).

[7] See, for instance, Liu, C. (2016). Chinese Company and Securities Law (2nd ed.). Alphen Aan Den Rijn: Kluwer Law International B.V., p. 291, and CSRC. (2015, December 30). Measures for the Administration of Initial Public Offering and Listing of Stocks (2015 Amendment), Chapter III, Article 35.

[8] Leung, D. (2019, April 2). China's IPO reform: A double-edged sword. Retrieved April 12, 2019, from https://www.financeasia.com/Tools/Print.aspx?CIID=450879.

[9] SSE (2019a), supra note 3, at Chapter V, Section 1, Articles 38-49.

[10] SSE (2019a), supra note 3, at Chapter I, Article 8, and Chapter V, Section 1, Articles 38-49.

[11] SSE (2019a), supra note 3, at Chapter I, Article 8, and Chapter V, Section 2, Articles 50-53.

[12] SSE (2019a), supra note 3, at Chapter V, Section 2, Article 53. The specific department within the SSE responsible for such final report is not described in the SSE Rules on Sci-tech Board Listing.

[13] SSE (2019a), supra note 3, at Chapter V, Section 3, Articles 53-56.

[14] SSE (2019a), supra note 3, at Chapter V, Section 1, Article 48, and CSRC (2019), supra note 3, at Chapter III, Article 21. Period during which review was suspended, instructions were requested from competent authorities, on-site inspection were carried out and opinions of the listing committee were implemented, for instance, are not counted for the purposes of the 3-month deadline.

[15] CSRC (2019), supra note 3, at Chapter III, Article 24.

[16] Leung, supra note 8.

[17] SSE (2019a), supra note 3, at Chapter I, Article 10.

[18] SSE (2019a), supra note 3, at Chapter IV, Section 2, Articles 34 and 36.

[19] CSRC (2019), supra note 3, at Chapter II, Article 13, and Chapter III, Article 30(1).

[20] SSE (2019a), supra note 3, at Chapter IV, Section 1, Articles 28 and 29.

[21] SSE (2019a), supra note 3, at Chapter II, Article 15.

[22] See, for instance, Hong Kong Stock Exchange. (2019a). Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited, Chapter 3A.11. Retrieved May 6, 2019, from https://en-rules.hkex.com.hk/sites/default/files/net_file_store/new_rulebooks/c/o/consol_mb.pdf.

[23] See, for instance, SSE (2019a), supra note 3, at Chapter I, Article 6, Chapter III, Article 19, and CSRC (2019), supra note 3, at Chapter I, Article 6. See also, SSE. (2019c, March 1). Notice of the Shanghai Stock Exchange on Issuing the Guidelines of the Shanghai Stock Exchange for the Content and Format of the Sponsorship Letter for Listing on the Science and Technology Innovation Board.

[24] Bloomberg News, supra note 1. See also, Jing, S. (2019, April 18). Rules tightened for IPO sponsors on new board. Retrieved May 3, 2019, from www.chinadaily.com.cn/201904/18/WS5cb7e8daa3104842260b6e96.html. On a side note, as of the date of this paper, the author could not locate English versions of the regulations relating to the aforementioned media reports.

[25] China Law & Practice. (2010, January). Preliminary comparison between ChiNext and SME. Retrieved April 23, 2019, from https://search.proquest.com/docview/224 808172?accountid=14548.

[26] Red Chip companies are defined as those incorporated outside Mainland China with businesses concentrated in the Mainland (Pang, J., & Lo, S. (2017). Effect of Place of Incorporation, Chinese Culture, and Business Practices on Corporate Fraud: Evidence from Hong Kong Listed Companies. Asia-Pacific Journal of Financial Studies, 46, p. 223).

[27] Article 22 of the SSE Rules on Sci-tech Board Listing states that an issuer must fulfil at least one of the following listing standards: (i) expected market value (EMV) of at least RMB 1 billion, accumulated with positive net income in the past 2 years and accumulated net income not less than RMB 50 million; (ii) EMV of at least RMB 1 billion, accumulated with positive net income and revenue of not less than RMB 100 million in the previous year; (iii) EMV of at least RMB 1.5 billion, accumulated with a revenue for the previous year not less than RMB 200 million and research and development (R&D) expenditure for the past 3 years exceeding 15% of the revenue of the same period; (iv) EMV of at least RMB 2 billion, accumulated with a revenue for the previous year not less than RMB 300 million and net cash flows for the past 3 years exceeding RMB 100 million; or (v) EMV of at least RMB 3 billion, accumulated with a revenue for the previous year not less than RMB 300 million. Article 22 provides one last less arduous option where an issuer may “simply” declare an EMV of at least RMB 4 billion if, subject to the government’s approval, its business or product has great market potential and made considerable progress (for instance, pharmaceutical companies with a key product under phase II clinical trials).

[28] Articles 23 and 24 of the SSE Rules on Sci-tech Board Listing allows (a) Red Chip companies with key technologies that are achieving fast growth and have not yet listed their shares overseas, and (b) issuers with differentiated voting rights to choose between the following listing standards: (i) EMV of at least RMB 10 billion; or (ii) EMV of at least RMB 5 billion, accumulated with a revenue for the previous year not less than RMB 500 million.

[29] SSE. (2019b, March 3). Notice by the Shanghai Stock Exchange of Issuing the Questions and Answers by the Shanghai Stock Exchange on Examination of the Issuance and Listing of Stocks on the Science and Technology Innovation Board, question II, item A(1).

[30] Id, at question II, item A(2).

[31] Id, at question II, items A(3)-(5).

[32] Adeyeye, P. O., Aluko, O. A., Fapetu, O., & Migiro, S. O. (2017). How financial liberalization impacts stock market volatility in Africa: Evidence from Nigeria. Investment Management and Financial Innovations, 14(3), p. 292, citing Spyrou, S. I., & Kassimatis, K. (1999). Did equity market volatility increase following the opening of emerging markets to foreign investors? Journal of Economic Development, 24(1), p. 39-51.

[33] Miles, W. (2002). Financial deregulation and volatility in emerging equity markets. Journal of Economic Development, 27(2), p. 114, citing Reinhart, V. (2000). How the Machinery of International Finance Runs with Sand in its Wheels. Review of International Economics, 8(1), p. 74-85.

[34] Adeyeye, Aluko, Fapetu, Migiro, supra note 32, at p. 292, citing Bhattacharyya, S. (2014). Financial deregulation and asset price volatility under perfect and imperfect information. Jordan: International Economic Association 17th World Congress.

[35] Stiglitz, J. E. (2000). Capital Market Liberalization, Economic Growth, and Instability. World Development, 28(6), p. 1079.

[36] Id.

[37] Id, at p. 1084.

[38] Adeyeye, Aluko, Fapetu, Migiro, supra note 32, at p. 292.

[39] Miles, supra note 33, at p. 124.

[40] Huang, W. (2008). Stock Market Effects of Emerging Markets Financial Liberalization. Ningbo: University of Nottingham, China Campus, pp. 3, 5. However, according to Huang, gradual development and diversification of the market should reduce market volatility in the long-term.

[41] Stiglitz, supra note 35, at p. 1080.

[42] Miles, supra note 33, at p. 115.

[43] Stiglitz, supra note 35, at p. 1080.

[44] Id, at p. 1076.

[45] Id, at pp. 1076, 1083.

[46] Miles, supra note 33, at pp. 115-116.

[47] Stiglitz, supra note 35, at pp. 1075-1076.

[48] Leung, supra note 8.

[49] Namely Mainland Private Enterprises, Red Chip companies and H-share companies (Pang & Lo, supra note 26, at p. 223).

[50] Pang & Lo, supra note 26, at p. 221.

[51] Pang & Lo, supra note 26, at p. 224.

[52] Hong Kong Stock Exchange. (2019b). About HKEX. Retrieved April 19, 2019, from https://www.hkexgroup.com/about-hkex/company-information/about-hkex?sc_lang=en.

[53] Pang & Lo, supra note 26, at p. 224.

[54] Id.

[55] Id.

[56] Bloomberg News, supra note 1. See also, Jing, supra note 24.

[57] Leung, supra note 8.

[58] Bloomberg News, supra note 1. See also, Jing, supra note 24.

[59] Feng, R. (2019, February 28). Shanghai tech board close to launch as funds eye retail bid. London: Global Capital. Retrieved April 25, 2019, from https://search.proquest.com/docview/2200497295?accountid=14548. See also, Yu, Z., & Jia, D. (2019, April 23). China Approves First 7 Funds for New Tech Board Investment. Retrieved May 7, 2019, from https://www.caixinglobal.com/2019-04-23/china-approves-first-7-funds-for-new-tech-board-investment-101407258.html, and The Standard. (2019, March 4). New Shanghai tech board sets 500,000 yuan asset limit for investors. Retrieved May 7, 2019, from https://www.thestandard.com.hk/breaking-news.php?id=123188&sid=2. On a side note, as of the date of this paper, the author could not locate English versions of the regulations relating to the aforementioned media reports.

[60] Gü?bilmez, U. (2014). Why do some Chinese technology firms avoid ChiNext and go public in the US? International Review of Financial Analysis, p. 179. Other initiatives include SZSE’s Small and Medium-sized Enterprise board launched in 2004 and the National Equities Exchange and Quotation (also known as the “New Third Board”), an over-the-counter market established by the State Council in 2012 (Investopedia. (2018, May 31). Shenzhen Stock Exchange (SZSE). Retrieved May 3, 2019, from https://www.investopedia.com/terms/s/shenzen-stock-exchange-shz-.sz.asp, and National Equities Exchange and Quotations. (N/A). Company Profile. Retrieved May 3, 2019, from https://www.neeq.com.cn/company/introduce.html).

[61] Shenzhen Stock Exchange. (2019, April 1). Securities Summary. Retrieved April 16, 2019, from https://www.szse.cn/English/siteMarketData/marketStatistics/securities/index.html.

[62] Gü?bilmez, supra note 60, at p. 193.

[63] Id.

[64] CSRC. (2018, June 6). Measures for the Administration of the Initial Public Offerings and Listing of Stocks on ChiNext (2018 Revison), Article 11, items (2) and (3). Retrieved April 18, 2019, from https://www.pkulaw.com/en_law/6db950c8b7c949eebdfb.html.

[65] Gü?bilmez, supra note 60, at p. 193.

[66] Yanfei, W., & Hua, C. (2018, December 19). Shenzhen bourse to lower barriers for listing on ChiNext. Retrieved April 16, 2019, from https://www.chinadaily.com.cn/a/201812/19/WS5c199e13a3107d4c3a0018c5.html.

[67] SZSE. (2018, September 25). Listing Fees. Retrieved April 16, 2019, from https://www.szse.cn/English/listings/listFees/t20180925_563124.html.

[68] Gü?bilmez, supra note 60, at p. 180.

[69] Id.

[70] Although Gü?bilmez clarifies that high issuing costs are not the reason why ChiNext is not attractive for Chinese companies, it should be noted that his research only considers venture capital-backed companies (Gü?bilmez, supra note 60, at pp. 180, 193); hence, while no further research including companies other than those backed by venture capitalists is carried out, the notion that high issuing costs could prevent smaller companies to list in domestic bourses like ChiNext and the Sci-tech Board should not yet be discarded.

[71] Leung, supra note 8.

[72] Id.