It appears the launching of transactions on the small and medium-sized enterprise (SME) board at Shenzhen's stock exchange failed, last Friday, to stir up as much excitement as it probably would have had it started trading, as was expected, in 2000.

The inaugural capital market, also known as the "second board," is the successor of the "high-tech board," which was scheduled four years ago, but was aborted after the NASDAQ collapsed amid the bursting of the dotcom bubble.

NASDAQ's boom years, 1998 and 1999, triggered great fervor among Chinese investors, who were anxious to establish a similar market in China. For a time, there were high expectations that a second board would spur the development of China's high-tech firms, especially within the information technology (IT) industry.

Reaction to the SME board we have today, however, is much more subdued. According to an Internet survey, 45 percent of non-institutional investors said they would watch before making a decision about investing in the firms on the board, while 24 percent said they would buy shares of the eight companies. The remainder of respondents said they did not plan to invest on the new board.

Institutional investors, including fund and securities companies, were even more cautious. According to the survey, 68 percent of the companies said they had adopted a wait-and-see attitude, while 32 percent said they were not interested in the new market.

Such prudent reactions suggest China's investors have matured. That is in sharp contrast from years ago when they zealously bought whatever new shares were floated in the stock market. Reason has prevailed over fanaticism.

The investors' cautious attitude is also a good reminder for the listed companies, and those that hope to list, that they should try to foster a good reputation by doing business in an honest manner, and on a sound basis of substantial performance. They should honor their responsibilities to shareholders rather than merely think of the capital market as a vault full of cash.

They must also learn the ways of modern corporate management. Most of the companies listed, and those to be listed, on the SME board are private firms. Many are family owned companies under a patriarchal management mechanism. Outdated management practices often lead to the short-sighted pursuit of instant benefits by the controlling owner -- at the expense of shareholders' long-term interests.

Market administrators should also work hard to forestall any possible irregularities, so as to ensure the new bourse's healthy development.

The birth of the new board is good for China's economy, as it opens a new channel for SMEs to raise capital. The high threshold and conditions set by the main stock market and banking institutions have denied private companies easy access to needed capital.

SMEs account for about 48 percent of China's gross domestic product, and they are the main employer of China's workers laid off from state-own enterprises, and migrant laborers from the countryside.

Armed with funds raised from the new capital market, SMEs will undoubtedly expand, employ more laborers and, hence, help enhance China's domestic consumption. That will be the major force that propels the nation's economic growth.

(China Business Weekly July 5, 2004)