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Govt to expand off-exchange trading

By Wang Jiamei  (Global Times)

08:37, August 06, 2012

The State Council, China's cabinet, has approved the expansion of a pilot program under which unlisted companies are allowed to sell shares on an over-the-counter (OTC) trading platform, an official from the China Securities Regulatory Commission (CSRC) announced at a press conference in Beijing Friday.

Though the OTC platform, which aims to give small technology and high-growth enterprises easier access to funding amid a slowing domestic economy, will serve as an effective supplement to the mainland A-share market, it may also arouse investor worries about tightened liquidity pressure in the stock market in the short term, analysts say.

In addition to the OTC pilot established in 2006 at Beijing's Zhongguancun Science and Technology, the country will expand the pilot zones to the Zhangjiang High-Tech Industrial Development Zone in Shanghai, the East Lake High-Tech Development Zone in Wuhan, Hubei Province and the Binhai High-Tech Industrial Development Area in Tianjin, the CSRC official said.

Meanwhile, the CSRC will set up a share transfer system for the nation's small and medium-sized enterprises (SMEs), in a bid to gradually bring other qualified industrial zones under the pilot OTC program and offer relevant services for unlisted companies in the pilot zones, according to the official.

The official also said that as the OTC market mainly targets small-scale private financing, the funds raised through this platform will be limited even after the expansion. For instance, in the case of Zhongguancun Science and Technology Zone, more than 100 companies participating in the pilot program have only raised a total of 1.73 billion yuan ($271.48 million) over the past six years.

Yet, concerns about squeezed liquidity still exist. A recent research report on the OTC market released by China Merchants Securities estimates that the potential capital volume of the market will reach nearly 700 billion yuan, which will inevitably divert capital flow from the A-share market, the Yangtse Evening Post reported Sunday.

Moreover, past experience also shows that news about the OTC pilot was often interpreted negatively by A-share investors. On March 28, the Shanghai Composite Index and the Shenzhen Component Index plunged 2.65 percent and 3.15 percent respectively after fears of tightened capital were sparked by a news update about the OTC platform.

"Considering the sluggish sentiment in the current market, the OTC expansion plans will likely exacerbate concerns over the liquidity restraint and drive the A-share market to dive again Monday," an analyst from Aijian Securities, who preferred to remain anonymous, told the Global Times.

Nevertheless, Dong Dengxin, director of the Financial Securities Institute at Wuhan University of Science and Technology, pointed out that in the long run, the move is actually good news for the country's capital market as it will provide more financing vehicles for SMEs that have difficulty getting funds.

"But it should be noticed that this is a high-risk market, especially for venture capital, and not suitable for individual investors," Dong said.

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