BizChina

You wouldn't think that the worst economic downturn in 70 years would be a good time to open a new stock exchange. But the Chinese do. After a decade of delays, Beijing has decided to debut its Growth Enterprise Market (GEM)—China's very own version of New York's NASDAQ exchange. Under rules due to take effect this month, China's "second board," located in the southern city of Shenzhen, across the border from Hong Kong, will allow companies with just three years of operation, net assets of 20 million renminbi (just under $3 million U.S.) and combined profits of just 10 million renminbi to sell stock to the public.

The plan is going ahead even though China's main exchange in Shanghai has only partially recovered from its bottom late last year, when it was down by some two thirds. That says a lot about the economic competence—and the confidence—of the Chinese. Just as Beijing used the Asian financial crisis as a push to move ahead with trade reform, so leaders today see the global downturn as a chance for China to expand its reach in capital markets—to grow while others are faltering.

China recently announced plans to allow settlement in renminbi (RMB) for trades in Hong Kong—an important step on the road toward full convertibility of the Chinese currency. A flexible currency is a key part of making Shanghai a truly international financial center, another goal that the Chinese are now putting front and center. At a recent press conference, Liu Tienan, deputy director general of China's National Development and Reform Commission, gave a strong speech to that effect, proclaiming that the country's aim by 2020 is to build financial centers "appropriate to China's economic power and the international status of the RMB." Liu also stressed that China's financial sector should be not just "big, but strong."

A market like GEM, which targets small and midsize privately held businesses, will be a crucial step toward that goal. So far most of Beijing's $585 billion stimulus program has gone to state firms in industries like construction, real estate and transport. But about two thirds of China's GDP comes from the nonpublic sector—and small businesses create the majority of new jobs. In GEM, they'll have a new mechanism for raising sorely needed capital.

Some industry observers also see GEM as not only a step forward in China's move away from traditional communist ideology, but as part of a wider industrial transformation, as China seeks to promote innovation. "Supporting high-growth SMEs which have prestigious proprietary technology—and an element of sustainability beyond cheap labor—is now part of the central strategy as opposed to something on the periphery," says Robert L. Kuhn, a senior adviser to Citigroup Global Investment Banking, who has advised the Chinese government on reform. There is, he adds, "recognition that the Chinese financial system has not been conducive to these kinds of companies" and new measures are necessary.

The new market also addresses another problem—how to put China's pent-up capital to use. The Chinese have saved up some $2 trillion in foreign capital, yet as Yao Yang, deputy head of the China Center for Economic Research at Peking University, notes, "A lot of this has just been hoarded rather than invested—this shows we have big problems in our financial system. The money should be used in markets like GEM, something that would benefit the Chinese and the global economy."

There's no doubt that opening the new market at a time of economic instability is a risk. Just last month, Yao Gang, vice chairman of the China Securities Regu-Commission acknowledged that about half of the companies originally chosen as candidates for GEM listing are no longer qualified due to a slump in their performance. There's also the fear that if investors lose money on risky startups it could increase social instability—as Kuhn notes, Chinese investors still have the attitude that "if we make money it's ours—but if we lose money the government got us into this and so they have to support us!"

But the Chinese also have a history of making tough changes in tough times. Premier Wen Jiabao made a point of saying last month that the current situation demanded "more reform," not less. And in some ways, it may be easier to develop Chinese capital markets in a downturn, when the risk of overheating is less. "I think that China and its leaders feel that the relative position of China in all areas is now enhanced by recent economic events," says Kuhn. It's a moment the Chinese aim to exploit to the fullest.

The government will send an investment and procurement delegation to Europe during the first half of this year, an official with the Ministry of Commerce said. The move follows a similar mission to four European Union nations in February.

"We are actively preparing for a second purchasing and investment delegation to Europe," said Wu Xilin, an official in charge of the ministry's outward investment department. The exact date has not been decided yet, but the team will leave before June, Wu said at a press briefing yesterday.

The government supports overseas investment by Chinese enterprises. "China's outward investment carries a lot of significance amid the financial crisis," Wu said. "It is good for the stability of our foreign trade and industry structure."

The countries that the delegation would visit have still not been decided, Wu said. But "France is not ruled out", he said in response to a question about whether the team would visit France, as it was not included in the previous trip.

Experts agreed that this was right time for Chinese firms to eye global investment opportunities as overseas assets are getting cheaper due the economic downturn.

"There are more opportunities for overseas mergers and acquisitions, and the investment cost is getting lower," Wu said. In addition, the less impacted emerging markets would invest more on infrastructure construction, and there were more opportunities for contract projects in these countries, Wu pointed out.

He, however, warned that overseas investments could be risky.

"The strength of Chinese enterprises, overall, is quite weak at this stage. They still lack the capital, market channel, and management necessary for international operation," he said.

"Many of the advanced sectors in developed countries are facing cash flow problems now," said Xing Houyuan, a senior researcher on outbound investment with the commerce ministry. "This is good news for Chinese firms that are keen to improve their own technologies," she said.

In addition, many firms from developed countries have either cut or cancelled their investments in developing countries, and Chinese firms could utilize this opportunity and fill the gap, said Xing.

To profit from such opportunities, the government has organized several such trips overseas. The commerce ministry sent a delegation to Germany, Switzerland, Spain and Britain in February. The trade mission, led by commerce minister Chen Deming, signed deals worth more than $13 billion.

A business team is currently in the United States, where it has signed trade and investment contracts worth $10.6 billion, according to a report in the Xinhua news agency.

China's overseas investment has been increasing rapidly in recent years. In 2008, the country's outbound investment in the non-financial sector soared by 63.5 percent to $40.65 billion. The contract value of projects in other countries and regions went up by 39.4 percent to $56.6 billion.

During the first quarter of this year, China set up 445 enterprises overseas, up 6.8 percent year-on-year.

The Ministry of Commerce earlier this month released guidelines for overseas investment and cooperation with 20 countries. The country-by-country guidelines provide basic information on setting up an overseas enterprise.

Liang Guining, a researcher with the ministry who specializes in investing in Africa, said many developing countries are not transparent in decision making and do not have proper laws and regulations to protect foreign investors.

The three-day Central China Expo ended in Hefei, capital of the Anhui province on Tuesday, with contracts worth more than 27 billion U.S. dollars signed.

At the expo, China's six central provinces - Henan, Shanxi, Hunan, Hubei, Jiangxi and Anhui - got foreign investment of 6.37 billion U.S. dollars.

They also inked contracts with domestic companies from other parts of China, drawing an investment of 144.9 billion yuan (about 21.3 billion U.S. dollars).

The region, with six provinces and considered to be central China, covers 1.03 million square kilometers and its population accounts for 28 percent of China's total. Its provincial economies make up 20 percent of the national total. It is a major grain production base, an important transport hub and a leading energy and raw materials supplier.

The Central China Expo was co-hosted by the Ministry of Commerce, the state administrations of taxation, for industry and commerce, tourism, and radio, film and television, as well as governments of the six provinces.

The Expo attracted 16,000 business people, including representatives from 300 of the "Fortune 500" multinational corporations such as Carrefour and IBM.

The building and testing of a machine that can create super X-rays capable of exposing the complicated structures of chemical compounds and proteins has been completed at Shanghai Zhangjiang High-tech Park in Pudong New Area.

The Shanghai Synchrotron Radiation Facility is expected to significantly boost China's capability and competitiveness in scientific research, especially in life sciences, officials from the Shanghai Institute of Applied Physics of the Chinese Academy of Sciences, the facility's key developer, were quoted as saying by Thursday's Shanghai Daily.

The 1.2 billion yuan (176 million U.S. dollars) particle accelerator, China's biggest light facility, will also help in the study of viruses and new drugs and the development of technology.

Next month the synchrotron will be opened to universities, scientific institutes and companies for approved research.

The trial operation of the facility in about 60 projects since last month has already yielded results.

"We have found seven new structures including one enzyme which can break down an environmental toxicant," said He Jianhua, head of the institute's synchrotron radiation experiment division.

The institute is cooperating with the Shanghai Institute of Material Medica on researching treatment of bird flu and is expected to work with Sinopec on petroleum catalyzers.

"The machine will be an effective tool in research on viruses as well as for swine flu medicines although we haven't received a request yet," He said.

The facility was jointly proposed by the Chinese Academy of Sciences and the Shanghai government in 1995, with construction starting in December 2004.

The synchrotron's beamlines were adjusted from May last year to March. So far the facility has built seven beamlines and experimental stations for research and development in life sciences, new materials, physics and biochemical projects.

The particle accelerator can produce X-rays thousands of times stronger than normal X-ray machines capable of exposing the minute structure of human proteins.

"Thanks to the technology, we can know a protein structure within 20 minutes. Such a procedure usually took several months," said He.

The institute hopes to complete the facility's proposed 60 beamlines by 2020, and have 40 completed by 2015.