China's securities watchdog Monday approved the establishment of a small and medium-sized enterprise (SME) board in the Shenzhen Stock Exchange.

The SME board, the beginnings of a long-expected second board market, will be built as a special sub-board of the main Shenzhen board and cater to small and medium-caps.

But it will be running rather independently, with its own index, trade code and supervision system, according to a press release from the China Securities Regulatory Commission (CSRC) Monday.

The CSRC approval followed permission from the State Council.

Authorities also accepted rules designed by the Shenzhen exchange on the issuing, trading and supervision systems of the SME board.

That is a substantial first step towards the development of an entirely independent second board market, a CSRC spokesman said.

The step-by-step approach is expected to help the exchange and regulators get better prepared for higher risk control requirements.

As early as 2000, Shenzhen had planned to launch a NASDAQ-style second board market and then suspended initial public offerings (IPOs) on the main board to prepare for the new market, but the slump of similar markets overseas then and the burst of the bubbles on tech stocks made Chinese authorities cautious against speculation and risk.

The plan was then temporarily shelved but was raised again this year in a guideline document of the State Council on the development of the capital market.

Launching the SME board would enrich China's capital market, which has been expanding rapidly but still has a rather simple structure, the CSRC spokesman said. It would also help SMEs get more funding.

As designated, the board will not just cover tech firms or start-ups, but a wider range of stocks.

The present threshold for listings will remain the same. But to strengthen risk control, regulators will introduce some special trading rules and enhance the requirement for information disclosure and auditing on the fund application for the SME stocks.

Neither CSRC or Shenzhen Stock Exchange said when new IPOs would start in Shenzhen. But most insiders believe it will happen very soon.

An investment banking source said many SMEs had lined up in front of Shenzhen on the expectation of an immediate resumption of IPOs there.

However, some investors also worry that the resumption of IPOs in Shenzhen would lead to a fast market expansion and divert some funds from existing stocks.

The CSRC spokesman said authorities would try to make the pace of new listings in line with the market capacity to maintain market stability.

(China Daily May 18, 2004)