China's capital market is starting to find its feet just months after it touched bottom following the outbreak of the global financial turmoil, which, in a way, exposed many of its inadequacies as a reliable funding source for private-sector enterprises.

Now, the nation's securities watchdog, the China Securities Regulatory Commission, has begun rolling out fresh or revised guidelines that will set the direction and tone of reform in the coming months.

At the core of the reform process are revised rules on new share issues by publicly listed companies to raise additional capital, or private companies seeking a stock exchange listing.

Another set of rules relate to the launch of a proposed Growth Enterprises Board that will help small and medium-sized enterprises, which otherwise do not qualify to list on the main exchange, to raise funds.

In addition, a "third" or over-the-counter market is being planned for trading in shares of unlisted companies, mainly start-ups.

Industry experts have likened the multi-tier capital market to a three-story building where the top floor is the main board, and the second board and the over-the-counter market are on the floors below it. They said the three floors would not work in isolation, which means qualified companies would be able to move "upstairs".

The regulator has been perfecting rules for the main board over the past 20 years. These have sought to improve the quality of listed companies on par with capital markets in developed countries. Yet, the "bottom floor" has lagged behind and not matched the progress at the "top floor", analysts said.

To speed the development of the "bottom floor", the Securities Association of China (SAC) recently modified rules on the agency share transfer market, also known in China as the "third board", effective from July 7.

The revised regulations highlighted five major changes, including a shortened lock-up period for some shareholders, lowered threshold for companies to join in the trading, a more efficient settlement system, more information disclosure and specifying institutional investors as the "proper investors".

The third board market can provide over-the-counter trading for stocks of smaller companies, mainly in the technology, media and telecom sectors. Companies without the qualifications needed to list on the A-share market may also retreat to the board temporarily.

The Zhongguancun Science Park is the only institution with access to the agency share transfer system.

The park provides share transfer services for non-listed firms within the region exclusively. As of the end of May, 55 firms in the park had made quotes through the system and the total deals involved a combined 776 million yuan.

Unlike the bullish A-share market in Shanghai and Shenzhen, the turnover of the agency share transfer market is much lower. So is dealers' enthusiasm for the market because of low commission revenue. In addition, with the upcoming launch of the NASDAQ-style second board, the third board market may languish further.

"The Zhongguancun market is a pioneering project and we will see proper opportunities to expand the agency share transfer market to other qualified technology parks," Deng Yingling, vice-chairman with the SAC, said during a press conference last Friday.

The policy-makers are working on the share transfer mechanism to attract investors, he said.

(China Daily June 18, 2009)