Qu Jianguo, unable to borrow from banks to fund his small water treatment business, is hoping a Nasdaq-style second board in China, due for launch this fall, will help fill a hole in his country's financial system.

A big lending push by state-owned banks as part of a government stimulus plan is aimed mainly at other state-linked companies and consumers, leaving some firms struggling to finance their growth plans.

Banks don't want to lend to private companies, while small businesses like us can't qualify to list on the main board, says Qu, whose 8-year-old Canature Group hopes to raise money through an initial public offering on the Growth Enterprise Board.

The second board, aimed at high-growth start-ups, will take its first baby steps on Sunday when regulators start accepting listing applications, enabling entrepreneurs like Qu and his co-investors to raise money and sell stakes in their companies more easily.

China is counting on small but fast-growing companies like Canature to create jobs and reduce the nation's reliance on manufacturing.

Regulators and top leaders hope the board, based in Shenzhen, will become a cradle for start-ups that could someday nurture China's own version of Microsoft or Intel.

In the longer term, the board could become an important pillar in China's economy by stoking much-needed investment in the private-sector, especially for small and medium-sized businesses that are major employers and innovators.

The second board provides an exit strategy for venture capital and private equity firms, which would expedite financing and investment, said Song Jian, an analyst at China Minzu Securities.

From an investor perspective, the new board could become an important vehicle to soak up some of the more than $2 trillion in household savings sitting in banks and seeking higher returns in a country with limited investment channels.

STRUGGLING GEMS

The idea of second boards focused on smaller business isn't new. A host of countries have tried to copy the success of the Nasdaq, set up in 1971 and now host to about 3,800 companies including hi-tech giants Google and Intel.

Hong Kong started its own Growth Enterprise Market (GEM) in 1999 in the wake of the Asian financial crisis to aid a struggling economy, only to find the board lost its lustre after the Internet bubble burst and it struggles to this day.

Second boards in Germany and Japan have also been suffering from liquidity shortages.

Despite the long odds, some are still betting on the new board's ability to draw on China's huge economy and its rich crop of small and medium-size firms, now numbering around 10 million.

I'm quite optimistic that China's second board will be a success, said Thomas Deng, Asia strategist at Goldman Sachs. In such a big economy as China, there must be some new technology or products that will be widely accepted.

STRINGENT REQUIREMENTS

In order to list, applicants must post two consecutive years of profits, with combined earnings no less than 10 million yuan ($1.5 million). Otherwise, they must be profitable in the past year, with a net profit no less than 5 million yuan and operational income no less than 50 million yuan that year.

Regulators have also published a stringent set of rules to regulate underwriters, listed companies and their biggest shareholders, and investors must have at least two years of investment experience before gaining access to the second board.

The requirements are stricter than many similar markets, as Chinese regulators take a cautious approach in a country known for wild stock speculation.

The real concern is that the second board, being too small to attract institutional investors, might become a playground for speculators, said Jiang Jianrong, analyst at Shenyin Wanguo Securities Co.

Even the most sophisticated investors could still find it risky to bet on small, high-growth companies which typically own few tangible assets and operate in innovative business models that defy traditional wisdom of pricing.

When Internet stocks were hot on the Nasdaq, many valuation models were created, Song Liping, general manager of the Shenzhen Stock Exchange told a forum earlier this month.

But some of those models proved to be nothing but a joke later. ($1=6.832 Yuan) (Editing by Doug Young and Lincoln Feast)

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