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October 24, 2009

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After long wait, GEM finally set for trading

CHINA held a kickoff ceremony yesterday for its long-awaited Nasdaq-style growth board designed to feed innovative but capital-starved companies, with the first 28 firms set to start trading on October 30.

The launch followed nearly a decade of state efforts to create an independent board for small high-tech firms and to offer domestic investors a new investment channel with potentially bigger returns -- albeit with bigger risks.

The debut of the Growth Enterprise Market was delayed several times because of a variety of concerns, ranging from the after-effects of the global dotcom collapse to last year's market nosedive.

"Technology is the essence of economic competition, so boosting innovative ability is the key strategy for the country's development," Shang Fulin, chairman of the China Securities Regulatory Commission, said at the opening ceremony of the GEM yesterday in Shenzhen.

Full disclosure

Shang said the regulator will step up efforts to boost disclosure and curb insider trading on the new market. He also suggested that listing resources are abundant and would boost the equity supply on the board.

A total of 188 domestic companies have submitted applications to the commission for GEM listings, with nearly 70 percent of them from the electronics, new energy, pharmaceutical and modern services industries, Shang said.

Smaller firms account for 99 percent of all companies in China and 75 percent of employment. But banks have been reluctant to provide them with financing because they lack solid track records.

"The main boards can no longer fulfill financing requirements," Shang said. "The GEM offers a diversified financing channel for smaller innovative firms as well as providing a new option for investors."

High valuations

The first batch of 28 companies that are launching IPOs on the GEM have raised a combined 15.48 billion yuan (US$2.27 billion), compared with the targeted 7.08 billion yuan.

The average price of these firms was more than 55 times their earnings last year, compared with the average 36 times for IPOs on the main boards in Shanghai and Shenzhen so far this year.

"Investors on the new board will face risks from the high valuations and speculation on the trading debut," said Chen Dongzheng, chairman of the Shenzhen Stock Exchange. "We will conduct strict supervision over the board to prevent systemic risks and major adverse events."

The Shenzhen bourse has mandated that any share moving more than 80 percent either up or down on its first day of trading would be suspended until three minutes before the market's close.


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