September 29, 2009

Give GEM A Chance

ShenZhen Stock Exchange's Growth Enterprise Market or GEM board opens soon and most commenters have already declared it dead on arrival. The new board is meant to be a sort of NASDAQ for Chinese small and medium (SME) size businesses to list shares. The requirements for an initial public offering are far less stringent although Beijing's China Securitites Regulatory Commission will ultimately decide who gets to IPO. Many critics believe GEM won't have much of a chance as previous attempts at such boards in East Asia have fared poorly and China's giant state owned enterprises (SOEs) suck up liquidity and investor appetite.

But let's put GEM in perspective. The dominance of SOEs in Chinese stock markets is not unlike the dominance of chaebol firms in (South) Korean markets and the keiretsu on the Tokyo bourse. Just a little more than decade ago only 3 chaebol - Samsung, Daewood, and LG - dominated Korean stocks and accounted for almost 10% of Korea's GDP. Japanese keiretsu continue to dominate Tokyo. As for previous experience, Tokyo's first attempt at a SME board, the JASDAQ, was a flop listing only 3 companies in as many years. Just 10 years ago Tokyo set up the MOTHERS board (Market of the High Growth & Emerging Stocks) and Hong Kong set up its own GEM board. MOTHERS has fared better but it remains lackluster.

Time will tell if ShenZhen GEM follows the performance of other East Asian SME boards. But the biggest hindrance may come from Chinese stock traders as SME stocks are meant to be held long term not traded on market whims....

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