China's securities regulator recently publicized the rules for listing companies on the growth enterprise board (GEB), which will take effect on May 1, signaling the bourse will likely launch within the year.

In 2001, China decided not to launch the NASDAQ-like board for small and medium-sized companies, partly due to unfavorable global financial environment following the burst of the dotcom bubble in 2000, but more importantly because the country was not fully prepared for such a launch at the time. China had only a vague idea about what the board should be like and its awareness about the associated risks was rather weak. The conditions for launching the GEB were immature.

China has made impressive progress toward an open and fair capital market over the past eight years, thanks to such measures as the non-tradable share reform - the floating of previously State-owned shares onto the market.

Revisions to the Securities Law and the Company Law, together with a series of regulations on market activities and supervision has helped improve investors' risk awareness. China's State policy of independent innovation has contributed to improved legal, economic and administrative environments for setting up the bourse.

The launch of the GEB marks an important step in China's effort to build a multi-tier capital market.

The GEB will help small and medium-sized high-tech companies raise cash on the stock market to nurture their development. It will also make it easier for strategic investors to withdraw from these companies, a move that is conducive to developing private equity funds.

Increasing direct financing will lower the financial risks arising from too large a proportion of indirect financing. Industries that have high growth potential will see unprecedented opportunities, which is good for the growth of the capital market.

The US subprime mortgage crisis has caused great turbulence to global financial markets and driven the world economy into deep recession and discussions about its causes are heating up.

Some blame an overly long financial products chain without enough transparency, some cite moral problems in rating agencies and others criticize loose supervision. All these factors contributed to the crisis but the main fault was problematic financial products.

As China develops its capital market it needs to consider whether it should give priority to developing markets where investors are encouraged to seek increased value of listed companies, in a bid to lay a solid foundation for a mature capital market or give priority to speeding up financial innovation to develop the derivatives market.

The GEB is among those markets that form the basis for the capital market and one of the markets upon which the derivatives market depend. So it is a wise decision for China to give priority to developing the GEB. The move will pave the way for fostering the derivatives market as well as the whole capital market. It will also help bolster the country's stable economic growth and avoid the kind of damage done to the financial market and the real economy by the subprime mortgage crisis in the US.

A successful GEB needs high-tech companies with quality assets, a mature market system and regulations and the participation and supervision of prudent investors.

Investors need more adequate and balanced information about the listed companies as well as timely analyses of securities, industries and companies involved. Authorities should impose stricter rules about information disclosure to improve the transparency of listed companies' financial standing and operations.

Zuo Xiaolei, chief economist of Galaxy Securities

www.sohu.com.cn

(China Daily 04/06/2009 page2)