Compared to Western economies, such as the United States, China’s financial sector is comparatively small and its history of financial services and financial markets has been relatively short. Before 1978, China was isolated and had a planned economy. In the 1980s, the country began its slow process of economic liberation with the gradual introduction of a market economy which also brought about the development of a financial sector. In recent years, the financial industry has experienced significant development.
Stock Exchanges
Shanghai and Shenzhen are China’s financial centers. The two bourses were established in 1990 and have developed into large trading centers that compete with established markets. Even though their market capitalization lagged behind the Hong Kong Stock Exchange, their turnover was significantly higher. In addition to the two stock exchanges, the NEEQ is an equity exchange in Beijing, but it has a much smaller trading volume. In 2021, the Beijing Stock Exchange had been established as a subsidiary of the NEEQ.
The Shanghai and Shenzhen Stock Exchange both have different trading boards which cater to a specific type of enterprise. The Shenzhen Stock Exchange consists of the Main Board, the SME board, and the Chinext. The bourse in Shanghai has a Main Board and the Star Market. Companies that trade on the two main boards are matured, large enterprises that have a consolidated market position and consistently generate profits. The Chinext and the Star market are for young start-up companies, especially from the technology sector. Lower listing requirements give companies easier access to funding.
Creating an independent financial system
Behind the big push to develop China’s financial sector was the ambition of Chinese policymakers to build an independent financial market. However, due to the strict regulation of the Chinese market and its relative isolation from international investors, listing on foreign stock exchanges has become an attractive option for many Chinese companies. In particular, tech-startups seemed to prefer international stock exchanges, therefore, as a countermeasure, the Chinese government established boards such as the Chinext and Star-A market with more relaxed entry standards.
The creation of the Star Market board was the latest step towards building China up as a world financial center. After the launch of the board in 2019, it quickly became the favored exchange for a series of large IPOs. One of the key advantages of the Star market is more lenient listing requirements compared to other trading boards in the country. For instance, a company’s profitability is not a prerequisite for the listing process. This is especially beneficial for early-stage tech companies and will most likely attract further prominent IPOs into the future.
