Beijing [China], February 19: As the Beijing Stock Exchange (BSE) completed its fourth year in September 2025, its total market capitalisation exceeded 900 billion yuan ($129.1 billion), reflecting China's attempts to restructure capital markets to support innovation-led growth amid mounting economic pressure. This reveals a deeper feature of China's political economy - capital markets function less as liquidity-driven than as policy instruments that prioritise strategic industrial objectives.As China's third stock exchange, the BSE was not intended to rival the Shanghai or Shenzhen exchanges in scale. It was designed as a policy-driven market to channel capital towards strategically important but commercially fragile small- and medium-sized enterprises. This gap between state-led policy choices and market dynamism reveals how China finances innovation through capital markets.Unlike Shanghai's STAR Market or Shenzhen's ChiNext - both dominated by relatively mature, high-growth technology firms - the BSE targets 'specialised and sophisticated' small- and medium-sized enterprises, particularly firms designated as 'little giants'. These firms occupy niche roles in advanced manufacturing, industrial software and critical components central to domestic supply chain resilience under Chinese President Xi Jinping's techno-nationalist agenda.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.This focus highlights a shift from financing technological scale to cultivating depth. Many firms lack the profitability or scale demanded by institutional investors, but play outsized roles in incremental innovation and import substitution. By lowering listing thresholds, shortening approval timelines and allowing wider price fluctuations, the BSE gives firms access to public capital in early stages. BSE listings grew from 81 in 2021 to over 290 by late 2025.Despite rapid growth in listings, the BSE remains marked by thin liquidity. Between September and December 2025, average daily turnover fell to 77 million yuan ($11.1 million), a 35.7 per cent year-on-year decline. This is not an anomaly but reflects the logic embedded in the exchange's design and the constraints facing China's innovation financing ecosystem.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. Small firm size, limited analyst coverage and exclusion from benchmark indices reduce the exchange's attractiveness to institutional investors. This means that firms labelled as 'strategically important' struggle to generate sustained trading interest, while markets remain susceptible to sentiment-driven fluctuations.Many BSE-listed firms also operate in upstream manufacturing sectors such as advanced materials, industrial components and specialisedequipment.Innovation cycles are long and earnings visibility is weak in these fields - complicating price discovery and discouraging short-term trading due to high valuation uncertainty. This reinforces buy-and-hold behaviour over active turnover.This is compounded by the BSE's liquidity constraints, which are closely linked to the downturn in China's venture capital market. Regulatory tightening, slower growth and rising political risks have sharply curtailed the market for initial public offerings and reduced post-listing gains since 2022. With few success stories to anchor expectations, secondary market enthusiasm at BSE remains limited. So while the BSE has partially substituted a weaker venture capital exit channel, it has avoided the speculative momentum that often fuels market liquidity.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.Recognising these constraints, policy responses have been incremental and state-guided. The 2023 BSE reforms lowered transaction costs, eased investor eligibility requirements and encouraged dividend payouts and share buybacks to broaden investor participation while containing volatility.This shows how China's capital markets are being recalibrated amid intensifying technological competition. Markets are expected to mobilise private savings and impose financial discipline, but not to determine the direction of technological development. By managing the equity financing of small- and medium-sized enterprises through government policy, Beijing has strengthened its ability to align industrial policy, financial supervision and technological priorities through a state-driven capital market.The 15th Five-Year Plan reinforced this approach by framing capital market reform as an instrument for cultivating 'new quality productive forces'. Within this framework, the BSE is intended to stabilise funding for niche innovators, partially offsetting the contraction of venture capital and guiding China's financial geography towards greater central oversight.The BSE offers a clear insight into China's socialist market economy. Beijing appears willing to tolerate thin trading and limited price discovery in exchange for tighter policy control and strategic capital allocation. This trade-off defines the BSE's role in China's evolving financial system. The exchange's long-term significance will depend less on headline valuations than on whether this model can sustain innovation amid external uncertainty - functioning as a test case for how much China can leverage capital markets to serve its techno-nationalist goals.Source: Qatar Tribune
