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New board 'no threat to liquidity'

CHINA'S launch of the Growth-Enterprise Market won't exert pressure on liquidity in the main stock markets or lead to panic selling, industry analysts said yesterday.

"Experience from overseas growth enterprise markets, such as in the United States, Britain and Hong Kong, shows the GEM will have little impact on prices and turnovers on the main boards," said Xu Yan, an analyst of Shenyin and Wanguo Securities Co.

"But investors should still be cautious about investing in smaller stocks with a high valuation on the main boards, as the GEM may have a negative impact on these stocks in the short term," Xu said.

"The fundraising size of the new board is about 20 billion yuan (US$2.93 billion) in its initial stage, which won't threaten the liquidity of the main boards," said Ma Jiaying, an analyst at Cinda Securities Co.

"In the long run, the board can help the country set up a multi-level capital market and enrich investment products to enable various types of companies to raise funds," Ma said.

Chen Dongzheng, chairman of Shenzhen Stock Exchange, last month said there will be more than eight companies listed on the new board in the first batch.

Sherman Chan, an economist at Moody's, expected that aversion to risk may prompt investors to stick with relatively more stable companies such as banks as the economic outlook is still gloomy.

"One additional step that may significantly improve the effectiveness of this initiative is to allow foreign funds to invest on the new trading board, as Chinese firms have been attractive to overseas investors hungry for high-yield opportunities," Chan said.

An individual investor, surnamed Lu, said he expected the regulator to widen the daily trading limits on the board to 20 percent in either direction but stressed it must conduct strict reviews of candidates.

Caijing Magazine quoted a source close to the securities regulator as saying that companies on the new board will be delisted directly, rather than receive special trading limits, if found to have seriously broken any rules and that there will be no backdoor listings.

The GEM is just part of China's efforts to facilitate fundraising by small businesses as banks focus on lending to big companies. The country is expected to introduce more measures against a backdrop of sharply slowing economic growth.

The commission said it would work on establishing China's first equity index futures, as well as margin trading and short selling.

Index futures, often used as hedging tools by investors, allow an investor to make bets on the direction of an entire index rather than individual stocks.

Margin trading is the practice of borrowing money from a broker to purchase stock. Short selling permits people who believe share prices will drop to sell borrowed securities and buy them back at a lower price to repay the lender.


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