Why China's "start-up" bourse won't produce a Microsoft

By Wei Gu

HONG KONG (Reuters) -China hopes a new stock exchange, an incubator for start-up companies, will transform the nation into a global technology heavyweight after it is launched this year. But Beijing may have another think coming.

Intellectual property protections lack teeth and stifle innovation while inconsistent regulations don't do enough to prevent fraud. What's more, investors are already choking on a flood of new share offers that helped push China's share index down 34 percent in the first quarter this year.

A start-up market, which could be launched later this year, would provide a much-needed venue for China's small enterprises, which have been largely shut out of traditional funding sources such as banks and the main stock market.

But a second board, instead of attracting up-from-the-ground technology companies, is likely to be dominated by firms from traditional industries. Most Chinese companies still compete on cost, and few can afford to invest in cutting-edge technology.

Start-up boards in most countries wither and die, with Nasdaq being a bright exception.

The success of start-up markets hinges on whether a country has a rich culture of innovation that fosters entrepreneurs and a sophisticated financial system that encourages commercialization of technology. China has neither.

"It is useless just putting a market out there," said Steven Sun, a strategist at HSBC. "The market will probably just become a bank for small enterprises."

China does boast some big technology firms, such as Baidu (BIDU.O: Quote, Profile, Research, Stock Buzz) and Sina (SINA.O: Quote, Profile, Research, Stock Buzz). But they have listed on Nasdaq, attracted by its large base of technology-savvy investors.