Beijing Stock Exchange Prioritises Policy Goals Over Market Liquidity in Innovation Drive

The Beijing Stock Exchange (BSE) has surpassed 900 billion yuan (US$129.1 billion) in market capitalisation by September 2025, marking its fourth year of operation. The exchange is positioned as a policy instrument, channelling capital towards strategically important small- and medium-sized enterprises (SMEs) to support innovation-led growth, rather than operating as a liquidity-driven market. This reflects China’s broader capital market restructuring amidst economic pressures.

Strategic Focus on SMEs

As China’s third stock exchange, the BSE was not designed to rival the scale of the Shanghai or Shenzhen exchanges. Instead, its primary objective is to direct capital towards “specialised and sophisticated” SMEs, particularly those designated as ‘little giants’. These firms occupy niche roles in advanced manufacturing, industrial software, and critical components, central to enhancing domestic supply chain resilience under President Xi Jinping’s techno-nationalist agenda.

Unlike Shanghai’s STAR Market or Shenzhen’s ChiNext, which are typically dominated by relatively mature, high-growth technology firms, the BSE targets companies often lacking the immediate profitability or scale demanded by traditional institutional investors. Their significance lies in their contribution to incremental innovation and import substitution. Over 80 per cent of BSE-listed firms operate in strategic emerging industries, with nearly 53 per cent originating from China’s ‘Little Giants’ initiative.

To facilitate access to public capital for these early-stage companies, the BSE has implemented lower listing thresholds, shortened approval timelines, and allowed for wider price fluctuations. This approach has led to a notable increase in listings, growing from 81 in 2021 to over 290 by late 2025.

Thin Liquidity and Market Design

Despite the rapid growth in listings, the BSE continues to be characterised by thin liquidity. Between September and December 2025, the average daily turnover fell to 77 million yuan (US$11.1 million), representing a 35.7 per cent year-on-year decline. This low liquidity is not considered an anomaly but rather a reflection of the exchange’s inherent design and the constraints within China’s innovation financing ecosystem.

The BSE’s investor structure is narrow, with retail investors dominating despite high eligibility thresholds. Institutional investors account for less than 10 per cent of trading activity. Factors such as the small size of listed firms, limited analyst coverage, and their exclusion from major benchmark indices reduce the exchange’s attractiveness to institutional capital. Many BSE-listed firms operate in upstream manufacturing sectors like advanced materials, industrial components, and specialised equipment, where innovation cycles are long and earnings visibility is often weak. This complicates price discovery, discourages short-term trading, and tends to reinforce buy-and-hold investor behaviour.

The liquidity constraints are further compounded by a downturn in China’s venture capital market. Regulatory tightening, slower economic growth, and rising political risks have significantly curtailed the market for initial public offerings and reduced post-listing gains since 2022. While the BSE has partially substituted a weaker venture capital exit channel, it has deliberately avoided the speculative momentum that often fuels market liquidity.

Policy Trade-offs and Future Direction

The low liquidity on the BSE is viewed as a deliberate institutional trade-off, prioritising strategic financing and regulatory control over market-driven price discovery. Unlike China’s other two exchanges, which benefit from stronger institutional participation and clearer exit pathways to support higher turnover and valuation premiums, the BSE functions as a stabilising platform for firms that are not expected to generate rapid growth.

Recognising these constraints, policy responses have been incremental and state-guided. Reforms introduced in 2023 aimed to lower transaction costs, ease investor eligibility requirements, and encourage dividend payouts and share buybacks to broaden investor participation while containing volatility.

China’s capital markets are undergoing recalibration amidst intensifying technological competition. They 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 SMEs through government policy, Beijing has strengthened its ability to align industrial policy, financial supervision, and technological priorities via a state-driven capital market.

The 15th Five-Year Plan has reinforced this approach, 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, where Beijing appears willing to tolerate thin trading and limited price discovery in exchange for tighter policy control and strategic capital allocation. The exchange’s long-term significance will depend less on headline valuations and more on whether this model can sustain innovation amid external uncertainty, serving as a test case for leveraging capital markets to achieve techno-nationalist goals.