The Future of Stock Trading on China's Third Board
China's Third Board,set up as an over-the-counter stock trading system in Beijing's hi-tech area of Zhongguancun in 2006,underwent a major upgrading in 2013 with a national share transfer system put in place. This has allowed the Third Board to make rapid strides in its development. Since this breakthrough development,the number of traded companies has doubled and new record highs have been reached in market capitalization and the total number of outstanding shares. The number of new share issues and turnover all rose sharply and the price to earnings ratio continued to climb. Market liquidity improved and the investment structure of the traded companies has made substantial gains.
But there are still numerous shortcomings to the market - such as still lagging turnover compared to the other markets - and a number of reforms are needed to boost its role in helping raise funds for smaller companies.
As of the end of 2015,there were 5,129 companies traded on China's Third Board,14 times the tally of 2013 and three times the 2014 total. (At the time China Forex went to print,there were no full-year statistics for 2016) The Third Board market had about 300 billion shares on issue,surpassing the overall total on the more established Growth Enterprise Market (GEM),which along with its companion,the Small and Medium Enterprise market,comprises the second board. Both of these boards,based in Shenzhen,have been designed for companies that are somewhat larger than those on the Third Board. (The main or first boards are in Shanghai and Shenzhen and they are home to still bigger companies and those with a longer operating track record).
On the Third Board,the average number of outstanding shares of the traded enterprises is relatively small at 5,770 shares,only 15% of GEM and 10% of the SME market. At the end of 2015,the overall market value of China's Third Board reached 2.5 trillion yuan,more than five times the level of 2014 and 44 times of that of 2013. But the 2015 level was still only 44% of GEM and 25% of the SME.
The average market capitalization of the traded stocks on the Third Board was only 4.2% of GEM's average market value and 3.6% of the SME market. The price to earnings ratio of the companies trading on China's Third Board ranged from 30 times to 60 times.
The companies on the Third Board had relatively good earnings in 2015,with 83.09% showing a profit. Average earnings increased 39.45% over the previous year while revenues were up 14.46%. The same companies also showed much greater ability to pay back debt. More than 70% of the companies had liabilities of less than 50% of their assets.
In 2015,the number of new issues was also up sharply,with a steep rise in the amount of money raised for these smaller companies. In 2015 alone,there were 2,565 new issues,around 7.8 times the total for 2014 and 43 times that of 2013. There were 20.379 billion newly issued shares,around 8 times the 2014 total and 70 times the 2013 total. The offers raised a combined 121.617 billion yuan,more than 9 times the 2014 tally and 121 times the 2013 figure.
The Third Board has tried to encourage listings by employing relatively loose market access requirements and permitting small private placements of additional shares. Trading has relied on market makers with ongoing supervision and guidance and an information disclosure based on self-discipline.
But in 2015,there were 106 major asset restructurings of companies and 107 mergers and acquisitions on the Third Board,a big increase from 2014. This is likely to continue to be the case in the near future.
Market Characteristics
In general,the features of the new board are as follows