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CHINA (PRC FIRMS): An Introduction to Capital Markets: Domestic Issuances

Junjie Liang
Changcheng Ye
Haojia Zhuang
Alex Liu
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Capital Market: An Overview of IPO in Mainland China
Practice Area Overview in Chambers GCR 2022


In the first three quarters of 2021, over CNY368 billion has been successfully raised by around 370 Chinese corporations by way of domestic IPOs, while the number of corporations going public just exceeded 380 in 2020. It was expected that the number of Chinese corporations going public in the year of 2021 would overshadow that of 2020 in the near future. At the same time, a series of innovations, such as the merger between Shenzhen Stock Exchange main board and its small and medium-sized board (hereinafter referred to as "SME Board"), the progress of auditing standard for the science and technology innovation board (hereinafter referred to as "STAR Market"), the establishment of spin off and listing as well as the launch of the Beijing Stock Exchange, are also notable in the capital markets arena.

Merger of Main Board and SME Board in Shenzhen Stock Exchange

In February 2021, China Securities Regulatory Commission approved the merger of Shenzhen Stock Exchange's main board and SME Board.

Set up in the beginning of 2004, the SME Board had been serving as the main financing channel for corporations not eligible for issuance on main board, and paving the way for the growth enterprise market (hereinafter referred to as second-board market). Up until the merger, 1004 corporations had been successfully listed on the SME Board, signalling a huge success of this financing channel. At present, with the diversification of fund-raising approaches and the implementation of registration system, Beijing Stock Exchange and the second-board market appear as alternative options. After the merger, a new era in Chinese capital markets pillared by the main board of Shanghai Stock Exchange and its STAR Market, the main board and the ChiNext of Shenzhen Stock Exchange as well as Beijing Stock Exchange has begun.

Each pillar mentioned above plays a different role in capital markets. While STAR Market centres on assisting companies focusing on emerging sectors of strategic importance as well as high and new technologies, the ChiNext of Shenzhen Stock Exchange benefits corporations and start-ups involving integration between traditional industries and new technologies, industries and business models, and the Beijing Stock Exchange provides small and medium-sized companies that are in their early development stage with financing opportunities.

A Leap-Forward in Audit System for STAR Market: Hard & Core Technology Is Required

In the first half of 2021, multiple applications for issuance on STAR Market were withdrawn due to the development and change of audit system. Firstly, intermediary institutions are propelled to tighten their duties as gatekeepers in accordance with the requirements stipulated in the new version of Securities Law of the People’s Republic of China. Secondly, the disclosure of information about shareholders and relevant verification requirements are further strengthened. In addition, a more comprehensive evaluation of the possession of hard and core technology is emphasised in the audit system according to substance over form principle.

It is foreseeable that it will be the new normality in order to guarantee the quality of to-be-listed corporations, emphasise the uniqueness of the STAR Market as well as to avoid the overlap of different financing channels.

The Start of Spin-off and Listing 

On 12 December 2019, Chinese Securities Regulatory Commission issued Several Provisions on the Pilot Program of Listed Companies' Spin-off of Subsidiaries for Domestic Listing, stating the requirements, procedures and other ensuing supervision and inspection duties of the spin-off and listing of listed companies. A year later, Shengyi Electronics Co., Ltd. put an end to its long journey of application and became the first listed company to spin off and go listed on STAR Market on 15 February 2021. By the end of October, 8 A-share listed companies have successfully spun off their businesses to their subsidiaries and had them listed respectively.

To those giant, high quality listed companies involved in versatile fields of businesses, the provisions offer new routes for further development of derivatives and fund-raising. This mechanism also guarantees the independence between different businesses hence improving corporation management at large.

The Establishment of Beijing Stock Exchange 

On 2 September 2021, Xi Jinping, President of PRC, announced the establishment of Beijing Stock Exchange during a speech to China International Fair for Trade in Services. On 15 November 2021, the Beijing Stock Exchange started trading, indicating a big step forward to complete multilayered capital market, accelerate the perfection of financing support system for small and medium-sized companies, promote innovation-driving development and encourage economic transition and upgrade.

Of 81 listed corporations on the Beijing Stock Exchange, 71 were transferred from a selected layer of National Equities Exchange and Quotations (hereinafter referred to as “New Third Board”), and the other 10 went listed directly. As opposed to the Shanghai Stock Exchange and Shenzhen Stock Exchange, the Beijing Stock Exchange specialises in serving small and medium-sized companies which have characterisation, refinement, specialisation and novelty in their nature and function only as one link of the whole industrial chain.

The actual status of its operation, ongoing construction of audit system, financing and value assessment will be unveiled in the near future.

The Issuance of Guiding Opinions of Improving the Quality of Information Disclosure in Company Prospectus (Consultation Paper) 

On 29 October 2021, the Chinese Securities Regulatory Commission issued Guiding Opinions of Improving the Quality of Information Disclosure in the Prospectus under the Registration System (Consultation Paper) (hereinafter referred to as "Guiding Opinions") for public consultation. According to Guiding Opinions, intermediary institutions should scrupulously fulfil their duties in compiling the prospectus to improve reasonable trust principle and set duty boundaries between intermediary institutions.

Referencing foreign capital markets' practices, the Guiding Opinions points out that the content involving legal issues, businesses and financing issues in the prospectus can be compiled by recommending agencies in cooperation with law firms. As we can see, under the registration system, regulatory institutions will pay more attention to the quality of information disclosure and the protection of secondary market investors to realise the ultimate goal of high quality development of capital markets, and that Chinese lawyers will play a more important role.