For those who don't reside in China, when you think about the fortunes of Chinese equities, you probably ruminate about the A-share stock market. But really, the hottest equity market in China is the National Equities Exchange and Quotation or NEEQ, a name that is supposed to elicit images of the object of it's imitation: The NASDAQ.

Just a little background on the NEEQ. It was established in 2001, originally catered specifically to tech companies in the tech district of Beijing. From 2012 to December 2013, it underwent a restructuring that aimed to transform itself into the NASDAQ of China, a listing venue for small to medium sized companies. Over the past three years, the NEEQ has seen an explosive growth in company listings. The number of listed companies grew from 356 at the end of 2013 to 10,163 by December 2016.

The funny thing is that China has actually created equity exchanges to cater to SMEs twice before, both on the Shenzhen Stock Exchange under the guise of the SME Board and ChiNext. However, the listing requirements on both exchanges, though way more lax than the A-share main board, proved to be too stringent for SMEs still. NEEQ's appeal lies in its flexible system that effectively creates layers within the market. There are two pricing systems: (i)market making through securities brokers, and (ii)direct negotiated pricing between buyer and seller. Securities brokers select better quality companies to facilitate trading liquidity by taking on balance sheet risk, while companies with poorer risk profiles operate in the shadows of bilateral negotiation system.

Often, companies that are listed on the NEEQ do not receive any trading volume. However, it is precisely the market within a market system that let market forces to determine the borders between the layers instead of regulatory criteria attract the astonishing volume growth in companies seeking NEEQ as their listing abode. Staying true to its original identity, close to 30% of the listed companies are in the tech sector. However, the traditional buttress of the Chinese economy has also sunken its scraggly toe nails into this platform, with companies from industrial and raw materials together making up close to 40% of the total listed companies.

From a Geographic perspective, the distribution tracks closely with the vivacity of China's regional economies, with most companies coming from the BSG (Beijing, Shanghai, Guangdong) regions. However, secondary and tertiary economic regions in China are also springing forth companies that otherwise would be seeking listings on their regional equity exchanges whose trading liquidity levels reign supreme in viscosity.

Capital raising is the primary reason for every single company's listing on NEEQ. In 2016, a total of RMB146 billion was raised for 2,641 companies, averaging RMB56 million a pop.

Another key purpose the NEEQ serves is as the waiting room for companies that aim for A-share listings. Sure, it won't be the main-board, but the SME Board and ChiNext all carry the prestigious moniker of "A-share", so good enough. Out of all the NEEQ listed companies, above 50% meet the financial requirements of an A-share listing.

Going to the A-share ain't easy though, given the backlog of close to 800 companies. So, only a small fraction of NEEQ listed companies have formally announced that they are preparing for A-share listing in 2016.

So far, we haven't seen a lot of delistings from NEEQ, probably because there is no need to, given that companies can just park themselves there even with zero trading volume. However, we are seeing NEEQ enforcing stricter disclosure standards, and using forced delisting as punishment against those naughty incorrigibles. What could be interesting is the potential pick up in the number of delistings due to acquisitions. In a short span of 3 years, NEEQ effectively lifted more than 10,000 companies from the opaque information swampland of private companies into the well lit stage of transparent disclosure. This should help would be acquirers to focus their lenses on this arena. So, let's see if there will be a pick up in delistings from M&A in 2017.

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