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China ready to launch Nasdaq-style index

BEIJING -- China will launch trading on its long-awaited Nasdaq-style board on Friday in the hope of harnessing the vast amount of liquidity circulating in the economy for cash-strapped businesses, experts say.

ChiNext, based in the southern boomtown of Shenzhen, is expected to give small- and medium-sized companies (SMEs) access to financing and encourage private equity firms and venture capitalists to back start-ups, they said.

"The launch of the growth enterprise board is an important step towards implementing the national strategy on promoting innovation," Shang Fulin, chairman of the China Securities Regulatory Commission, said last week. The first 28 companies to list on the board, ranging from software to medical equipment makers, have raised 16 billion yuan (US$2.3 billion) in their initial public offerings — more than double initial forecasts.

"The launch of ChiNext represents a milestone in the development of China's financial markets and is an important part of the government's plans to boost support for small and medium-sized firms," said Jing Ulrich, managing director and chairman of China equities and commodities at JP Morgan in Hong Kong.

"The board will provide an additional source of financing for younger companies while broadening the options available to investors." Beijing has made listing rules for the second board less stringent than for the main A and B share markets, paving the way for SMEs to access much-needed cash.

SMEs, the biggest employers in China, struggle to obtain loans from commercial banks, which prefer to lend money to large state-owned enterprises.

ChiNext was expected to initially weigh on A and B shares as investors diverted funds to the new index, but analysts predicted the phenomenon would be short-lived.

"There will be a psychological impact but it won't be substantial," Ren Xianfang, a Beijing-based economist at IHS Global Insight, told AFP.

"Liquidity in China is ample. We have so much liquidity looking for new investment opportunities."

The Chinese economy is awash with money after Beijing unveiled a four-trillion-yuan stimulus package and loosened its grip on bank lending to help ward off the effects of the global downturn.

Jackson Wong, vice president at Tanrich Securities, said the new board would encourage private equity and venture capital firms to fund start-ups as they "will have more ways to cash out" investments once the company has listed.

But there are fears the new board will attract speculative traders, especially on the first day, and the bourse has introduced rules to curb their activity by setting a limit on share price movements for Friday. If the prices of start-up stocks move up or down 80 percent during the first trading day, the bourse will suspend trading until the final three minutes before the session ends, the Shenzhen Stock Exchange has said.

Two other debut-day circuit-breakers are in place — trading will be suspended for 30 minutes if shares in a company move up or down 20 percent from the opening price, and then another 30 minutes for a 50-percent shift.

ChiNext has said the restrictions will help curb risks, maintain market stability and protect investors.

"The size of share offering in the growth enterprise market is often not large; therefore, if investors blindly follow the trend, buying and selling stocks, prices are very vulnerable to wide swings," the exchange said.

Despite the hype, the second board was expected to have a limited impact on the Nasdaq, analysts said, with companies looking for exposure to global investors still likely to seek a U.S. listing.

"The growth enterprise market is just starting and is subject to manipulation so the risks are much higher than on the Nasdaq," IHS Global Insight's Ren said.

"For high-quality companies wanting to establish a global presence, I think they will still look at the Nasdaq because they will have more access to global capital."

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