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Yu Yang from Hummingbird Capital: Regulatory System of New T

Editor's note: NEEQ has recently examined the 2013 annual reports of listed companies and found out two regulation- violating members of Avic New Materials (NEEQ: 430056) and General Embedded Control (NEEQ: 430122). According to the nature, severity and responsibilities of the violation, NEEQ adopted corresponding self-supervision measures against the companies and their responsible persons. In the other day, Sui Qiang, the general manager assistant of NEEQ delivered a keynote representation, pointing out future focuses of the New Third Board: long-term orientation, market-orientation, innovative development and enhancement of supervision.

The paragraphs below are archived from videos:

China Business News (CBN): Is there any similar self-supervision measure in the traditional board market, and when compared to it, does the New Third Board show any difference in the system arrangement of information disclosure and violation punishment?

Yu Yang (YU): Actually, similar systems have been arranged in main board market. If the information disclosing party violates the Administrative Measures on Information Disclosure by Listed Companies issued by CSRC, CSRC will perform several supervision measures including interviewing the responsible persons, issuing him a warning letter, ordering him to correct as well as recording the violation in credit archives and announcing him as an improperly selected person.

When we compare the punishing system of NEEQ against information disclosure with the main board, we will find that after-measures of both are similar. The fundamental difference is that the main board pays more attention to the initiative management of supervisors, or to say it has shown a kind of paternalist care, while the new board deems compliance supervision of disclosure as the main line, and focuses on continuous supervision by the hosting securities company. It is self-regulated and managed, and the regulator is merely a kind of safeguard that investigates afterwards. This is actually representing a transit in capital market from examination and approval to registration.

CBN: As Sui QIang has pointed out, now the innovative development of our financing function has not reached the mature market level, so what can we do to strengthen innovation?

YU: The original intention of setting up the new board was to solve the financing difficulty against technology-based small and medium-sized enterprises, but now the high investment threshold in the market has made transaction languished in whole (e. g. threshold for individual investor is 5 million). Besides, the market's function is merely for property rights exchange, not really for financing.

In August, a market-maker system will be officially launched, and this is now the most practical solution to improve financing function of the new board. Negotiated trade is the current choice of new board enterprises, but in the market maker system, listed companies will see more transactions and better fluidity of shares, and thus it will become easier for the companies to attract concerns from investors and their participation.

The market makers make market for stock of listed companies; this has exactly demonstrated their recognition and confidence toward the companies. A kind of positive professional judgment is then delivered to the market, which may become rather helpful for a better credit rating and reputation in capital market of the companies.

However, we have to know that this system is not a cure-all; it may bring other side effects. The vitality of market is still the root cause for fluidity issue of new board, just as the secondary market of the main board. It has no market maker, but has been recognized by investors. The recognized degree of market is the Issue, so in the deep-rooted level, an investor team that belongs to the new board is required to ensure all market transactions of new board companies are performed in this market, so they won't consider a board change. Enterprises of different size raise fund and develop in markets of different levels, this is the root of a multi-level capital market.

CBN: The new board has exerted itself in serving the small, middle and micro enterprises and improving financing environment, and it has driven private capital to support real economy and integrated direct and indirect financing. How do you think about such functions?

YU: At first, we should affirm its functions in improving financing environment for small, medium and micro-sized enterprises, such enterprises have a single financing channel of bank loan. It is indirect financing and it is rather difficult to get. The launch of New Third Board has indeed brought direct financing chances to these enterprises by private placement and privately raised company bonds.

Meanwhile, we have found that the new board still has room to go further. The detailed rules for financing methods including preferred shares and corporate bonds have not been launched yet; we are looking forward to a rapid innovation by NEEQ companies and related authorities.

In addition, I have to remind all NEEQ companies that while water can float your boat, it can also overturn it. Diversified financing methods may call for a higher financial management level of the enterprises. You need to act according to your own features and strategic layout, but not blindly chase after higher financing or yield to financing at minimum cost. You are supposed to choose a best-fit for yourself according to the development stage you are in and your strategic demands to achieve long-range healthy development.

CBN: Moreover, Guangfa has stipulated that a company applying for such financing in its Beijing branch must meet three requirements: having annual sales revenue ranging from 10 million to 150 million, operating regularly for over two years after registration in Beijing as well as two years in the black and asset-liability ratio of or less than 70%. Financing cost is also estimated as 30% over the base rate. Is this reasonable, and is such financing cost acceptable for enterprises?

YU: It is not reasonable to query the rationality of the regulation. Guangfa was based on its own sake of risk control to propose such regulations. As this is a commercial activity, it may attach its own conditions. The market will vote with its feet to show if it is reasonable, and the 30% raise of financing cost is acceptable for or even welcomed by most Chinese small and medium-sized enterprises. We know that many of them could hardly obtain a loan from bank, and for capital facility they usually turn to privately raised bond, trust or even private financing, such channels have a higher cost of 30% than the base rate.