China Decides to Expand OTC Stock Market Nationwide

Dec. 14, 2013 5:17 a.m. ET

SHANGHAI—China is opening up its over-the-counter stock market to numerous small businesses, offering a fresh funding channel to the companies, which are seen as vital to employment and economic growth.

The State Council, or cabinet, said in a statement Saturday that the primary over-the-counter market is being opened to “qualified” companies around the country.

Until now, only unlisted firms in high-tech zones in four cities have been eligible for such fundraising activities through the national OTC OTCM 0.00% market, called the National Equities Exchange and Quotations System, where more than 300 firms trade.

The statement, which was dated Friday and appeared to be effective immediately, said the market is aimed at serving smaller, innovative and startup businesses.

Despite their major contribution to creating jobs and economic growth, small businesses in China have considerable difficulty raising money from banks or investors through capital markets. They are often cut off from loans from the state-dominated banking system, which tends to favor state-run companies, while the country’s stock listing and bond-issuance rules often block their access to traditional capital markets.

Beijing stopped approving any initial public offerings in October of last year, in a move that analysts say was aimed at shoring up market confidence by ending a share glut.

More recently, however, regulators have signaled that they are about to resume IPOs for the main stock exchanges and make share offers easier by removing some regulatory hurdles.

The OTC market was created to help unlisted firms that don’t meet listing requirements by letting them raise funds through share sales.

The OTC market is based on a trial program set up in Beijing in 2006. It was initially limited to companies registered in a special development zone for high-tech companies and was expanded to firms in high-tech zones in Shanghai, Wuhan and Tianjin in 2012.

The State Council statement said any joint-stock companies that meet requirements will be able to apply for the right to transfer shares, obtain equity or debt financing or reorganize their assets through the OTC market. Unlike on the main exchanges, which have stricter profit requirements, companies that aren’t profitable will be eligible for trading on the OTC market.

Companies on the OTC market can also apply for a stock-market listing once they meet the requirements.

The announcement followed a November meeting of top Communist Party officials in which a blueprint for reform was set out for the next decade. That program called for market forces to play a “decisive” role in the economy.

China’s leaders said they wanted to “refine the multi-level capital market system.” Market participants viewed the wording as a sign of Beijing’s support for the national OTC market.

As part of efforts to build an effective capital market system for domestic companies, China has gradually expanded its effort to offer access to smaller companies. Following the launch of the stock markets in 1990, it set up a board for small- and medium-size enterprises in 2004 and another for startup companies in 2009, where about 1,000 firms have been listed. These are still a tiny fraction of the nation’s smaller businesses.

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