China Focus: China capital market to fund innovative firms

China will turn to the capital market to help make financing more accessible to emerging and creative businesses, according to a central government guideline issued on Tuesday.

According to the guideline published by the State Council, the cabinet, rules for making initial public offerings (IPOs) will be relaxed and the Shanghai bourse will launch a new board for emerging and creative firms.

In China, the cabinet publishes guidelines to inform the drafting and revision of policies and regulations. Tuesday's guideline focused on supporting new businesses and facilitating innovation.

To file for an IPO, businesses must have turned a profit for the past two years and posted accumulated profits of no less than 10 million yuan (about 1.6 million U.S. dollars). This puts filing for an IPO out of reach for startups.

The State Council said in the guideline that it will look into ways to allow the listing of Internet and high-tech companies that are still unprofitable on the ChiNext, the NASDAQ-style board.

The guideline also called for an acceleration of a pilot program allowing some Internet and technology companies which have not yet turned a profit to get listed on the ChiNext after staying in the national equities exchange and quotations (NEEQ) system for a certain period.

This will make the ChiNext more attractive and give the NEEQ system greater status and momentum to expand, said Dong Dengxin, head of the finance and securities research institute at Wuhan University of Science and Technology.

In addition, the central government pledges to push forward plans to launch a new board, the "Strategic Emerging Industries Board", at the Shanghai Stock Exchange (SSE), according to the guideline.

"The proposed new board will aim to attract private capital in emerging and creative businesses, and provide an exit channel for private equity and venture capital investors," SSE vice general manager Liu Shi'an said at a forum in Shanghai, the country's financial hub, in May.

The new board will mainly target firms in the computing, renewable energy and biological technology sectors which have passed the startup stage, reached a certain size and shown a clear strategy, said Liu.

The guideline calling for accelerated plans to introduce the new board came three months after the SSE said in March that it had submitted a proposal to the country's top securities regulator.

"All these moves are set to stimulate the growth of private equity and venture capital investors, which will in turn promote the strategy of mass entrepreneurship and innovation," Dong said.

The guideline also encourages local governments to set up startup funds to support entrepreneurship and innovation.

These would help new firms "survive their most difficult times, the early stages", according to Chen Kexin, chief analyst at the Beijing-based Lan'ge Economic Research Center. Startups mainly rely on bank loans and venture capital for funding ordinarily.

The new policies are seen as part of the government's efforts to tap the potential of innovation and entrepreneurship in bolstering the world's second-largest economy as it slows down amid restructuring.

The central government has approved a slew of new measures in this drive, including financial support, tax incentives, facility construction and administrative assistance.

Weighed down by a housing market downturn, weak domestic and external demand and stuttering local investment, the economy grew at its lowest rate in six years in the first quarter, expanding 7 percent.

The central government has singled out "mass entrepreneurship and innovation" as "a new engine for the economy". Endi