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Beijing Stock Exchange: Policy Tool Over Market Liquidity in China's Strategy

A new report characterizes the Beijing Stock Exchange as a policy instrument designed to fund strategic sectors rather than a conventional, liquidity-driven market. It reveals that over 80% of its listed firms operate in strategic emerging industries, with many backed by the government's "Little Giants" initiative. The exchange exhibits deliberately thin liquidity, dominated by retail investors, as a trade-off for greater regulatory control and strategic capital allocation. This model highlights a key feature of China's political economy, where domestic markets are increasingly tasked with financing innovation while prioritizing stability over market-driven dynamics.

Key Points: Beijing Stock Exchange Serves as Policy Instrument, Not Market

  • Funds strategic 'Little Giant' firms
  • Tolerates thin liquidity for control
  • Over 80% firms in emerging industries
  • Retail investors dominate trading
2 min read

Beijing Stock Exchange functions less as liquidity-driven than as policy instrument: Report

Report reveals Beijing Stock Exchange prioritizes strategic industrial funding over liquidity, with over 80% of firms in emerging sectors.

"Low liquidity is... a deliberate institutional trade-off to prioritise strategic financing and regulatory control - East Asia Forum report"

New Delhi, Feb 17

The Beijing Stock Exchange reveals a deeper feature of China's political economy, where capital markets function less as liquidity-driven than as policy instruments that prioritise strategic industrial objectives, according to a new report.

China's stock exchange illustrates how China deploys capital markets as instruments of industrial policy while accepting limited market liquidity, said the report in East Asia Forum.

"Designed to fund 'little giant' firms in strategic sectors, the exchange prioritises strategic allocation and regulatory coordination over trading depth," the report mentioned.

Its total market capitalisation exceeded 900 billion yuan ($129.1 billion). As China's third stock exchange, the BSE was not intended to rival the Shanghai or Shenzhen exchanges in scale.

As overseas listings for Chinese companies become riskier and foreign investors more cautious about Beijing's role in them, domestic markets like the BSE assume greater responsibility for financing innovation without undermining financial stability.

"As a result, more than 80 per cent of BSE-listed firms operate in strategic emerging industries and nearly 53 per cent come from China's Little Giants initiative - a government program supporting small-scale firms in strategic technological sectors," said the report.

Despite rapid growth in listings, the BSE remains marked by thin liquidity.

"The BSE's investor structure is narrow. Retail investors dominate while facing high eligibility thresholds. Institutional investors, on the other hand, account for under 10 per cent of trading," the report further revealed.

Small firm size, limited analyst coverage and exclusion from benchmark indices reduce the exchange's attractiveness to institutional investors, it added.

Low liquidity is thus not simply a market failure but a deliberate institutional trade-off to prioritise strategic financing and regulatory control over market-driven price discovery.

"Unlike the other two exchanges, where stronger institutional participation and clearer exit pathways support higher turnover and valuation premiums, the BSE functions as a stabilising platform for firms unlikely to generate rapid growth," said the report.

The report further states that Beijing appears willing to tolerate thin trading and limited price discovery in exchange for tighter policy control and strategic capital allocation.

- IANS

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Reader Comments

P
Priya S
The "Little Giants" initiative sounds similar to our MSME focus, but the level of state direction is on another level. While it ensures funding for strategic sectors, the low liquidity and lack of institutional investors would be a major concern here. Our SEBI would never allow such a setup.
R
Rohit P
This is the classic Chinese model - control over everything, even the stock market. They are willing to sacrifice market efficiency for strategic goals. In India, we try to balance both, which is better for long-term growth in my opinion. Jai Hind!
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Sarah B
As someone who follows global markets, this is a fascinating case study. The report clearly states low liquidity is a "deliberate trade-off." It prioritizes funding innovation over price discovery. It's a risky model that could backfire if the selected "strategic" firms don't perform.
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Vikram M
With foreign investors becoming cautious, they are forced to rely on domestic channels like BSE. This is a lesson for us as well - we must strengthen our own capital markets to be self-reliant. Aatmanirbhar Bharat is the need of the hour.
K
Karthik V
Respectfully, I think the article misses a key point. While the control allows for focused investment, it stifles the very innovation it seeks to fund. True breakthrough ideas often come from market competition and diverse funding sources, not just state-picked winners. Our startup ecosystem, despite challenges, is more organic.

We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.

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