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China’s Private Stock Market Booms Amid an 800-IPO Backlog

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  • The so-called third board now has more than 8,000 listed firms
  • Over-the-counter venue is outlet for frustrated companies

A boom on China’s over-the-counter stock market has seen its ranks of listed companies swell 9 percent in the past two weeks, amid a backlog of initial public offering applications at the country’s exchanges.

The National Equities Exchange and Quotations hosts 8,622 corporations, according to its website, up 68 percent from the end of last year. That compares with 2,914 listed on the bourses in Shanghai and Shenzhen. Companies have this year raised 78.2 billion yuan ($11.8 billion) from share sales on Beijing-based NEEQ, known as the third board.

NEEQ’s rapid growth is helping to ease the thirst of small firms for capital and is also allowing regulators to develop a system in which companies get more flexibility on the timing and valuation of their share sales, which has been difficult to implement on the main venues. More than 800 companies are waiting for IPO approval on exchanges, according to the China Securities Regulatory Commission.

“The third board helps solve a big problem in China’s economy, allowing small and medium enterprises to raise funds despite a long queue for listings,” said Hao Hong, chief strategist at Bocom International Holdings Co. in Hong Kong.

Companies listed at NEEQ raise money by issuing new stock in placements after listing at the venue. Guangzhou Evergrande Taobao Football Club Co., China’s first soccer stock and backed by Alibaba Group Holding Ltd., listed its shares without raising money in November and sold 869 million yuan of new stock in December, according to a January filing. The sale price of 40 yuan a share valued the company at 15.9 billion yuan.

Founded in 2012, the third board is open to investors with at least 5 million yuan. At the end of last year, nearly 200,000 individual investors held accounts, a fourfold increase in one year, the operator’s website shows. The venue’s total market value of 3.17 trillion yuan at the end of July was more than double the figure from a year ago. Innovation Works (Beijing) Enterprise Management Ltd., a startup incubator founded by Kai-Fu Lee, the former China head for Google Inc., listed on NEEQ in February.

Despite its rapid growth, trading at the third board is small compared to China’s public markets. Total turnover on Aug. 11 was about 525 million yuan -- less than that on a single Shanghai-listed stock, Industrial & Commercial Bank of China Ltd. And the money raised is a fraction of that seen on the exchanges, which together have hosted $8.3 billion of initial sales and $104 billion of additional offerings in 2016, according to data compiled by Bloomberg. The nation’s benchmark Shanghai Composite Index fell 0.5 percent Tuesday after rising to a seven-month high on Aug. 15.

While the OTC venue offers opportunities to early movers, its companies are less researched and less regulated.

“The third board is the wild west of Chinese stocks,” said Hong.