OTC market firms fair well

China may soon take a major step forward to expand the country's over-the-counter (OTC) securities market, a move that experts said is a key to establish a multi-layer capital market, as companies traded in the market are believed to have entered a healthy stage of development.

Companies traded on the OTC securities market saw a surge in both revenues and profits for the first half of the year with 69 companies reporting a 75 percent increase in net profits to 359 million yuan year on year, according to the Securities Association of China.

The better-than-expected performance of OTC companies and the rapid growth of the OTC market have prompted the country's securities regulator to mull gradually expanding the pilot program of the OTC trading system to more cities across the country.

Shanghai and Wuhan, the capital of Hubei province are expected to launch an OTC trading system soon and detailed regulations may be revealed as early as October, according to Chinese media reports.

China established the first OTC stock trading pilot program in Beijing's Zhongguancun Science Park in 2006, known as the Zhongguancun Stocks Quotation and Transfer System.

Similar to the Over-the-Counter Bulletin Board (OTCBB) in the United States, the trading system provides an electronic financing platform for non-listed start-up companies to raise funds. By far there are 70 high-tech start-up companies traded in China's OTC market.

The OTC market was often referred as the third market before the launch of China's Nasdaq-style ChiNext board for start-up companies last year as it is a key component of a multi-layer capital market besides the main board and the small- and medium-sized enterprise board.

"The expansion of the OTC stock trading market is a critical and necessary step for China to improve its multi-layer capital market as many start-up companies that do not meet the regulator's requirements to go public are faced with significant difficulties raising capital to grow their businesses," said Zhang Xiaoqi, an analyst at GF Securities.

The securities regulator has reportedly given the green light for Shanghai to establish China's second over-the-counter market, creating a new equity-trading platform for unlisted start-up firms.

Fang Xinghai, director General of Shanghai's Financial Services Office, said that the market would be launched at the Zhangjiang Hi-Tech Park in Pudong with 36 start-up companies lining up to be traded.

In the meantime, it was reported that the regulator will reopen the OTC market to retail investors after it restricted trading to institutional investors only in 2009 on concerns of high risks in the market as OTC companies are usually thinly traded microcap or penny stocks that are easily manipulated.