Shares Skyrocket as China Launches New Stock Market to Compete with Nasdaq

By Alex Nnamchi, 8 August 2019

In its first week of launching, China’s new Nasdaq style equity exchange board has gotten off to an explosive start.  Deemed “STAR” for short, the Shanghai Stock Exchange Science and Technology Innovation Board began trading last Monday (the 22nd of July) with 25 listed companies.  China’s tech industry has received a vote of confidence from domestic investors after shares in the STAR board experienced significant gains. While volatile swings in share prices were widely anticipated due to loosened trading rules, actual market performances have so far excelled. On the opening day of trading, STAR stocks experienced an average of 140% in value increase, with the weakest increase (from software product manufacturer Harbin Xinguang Optic-Electronics Technology) surging by 84%. The week’s highest gains came from semiconductor producer Anji Microelectronics Technology, whose stocks rose up to 520% last Monday before going down to 400% the following day.  In total, day one saw the creation of around 305 billion yuan (US$44.3 billion) in new market capitalization on top of an initial market cap of around 225 billion yuan (US$31.6 billion). By the end of week 1 of trading, Initial Public Offerings (IPOs) were oversubscribed by an average of about 1,700 times among retail investors, reflecting the overall aura of excitement in China’s tech industry right now.

STAR was originally designed to attract high-potential tech companies to list domestically. The tech board was announced by President Xi Jinping last November as part of China’s push to counter pressure on its technology industry from Washington, which had blacklisted Chinese telecoms maker Huawei in May. Hence, the STAR Market became viewed as a strategic asset in Beijing’s push for technological self-reliance, where Chinese tech companies had either delayed or cancelled their US IPO following the ongoing trade conflict between the two superpowers. Given this, technology market board is considered to be a bold step towards financial market reform, as it features a US-style system for IPOs. At the moment, top companies such as Alibaba, Tencent, and Baidu, are listed on exchanges overseas due to the strict listing criteria of China’s other domestic stock markets. Its key priority sectors were highlighted by Made in China 2025, a government-led initiative to shift China from a low-end manufacturer to becoming a high-end producer of goods.

Shanghai’s new STAR board stands out from other domestic exchange markets as companies may in this case face more regular delisting due to the pilot registration-based IPO system. Under this system, eligible companies can become listed by filing the key required documents. In alternative situations, new shares of the A-share market were only subject to approval from the China Securities Regulatory Commission (CSRC), the national securities watchdog. The STAR market also implements other rules to make it easier for tech companies to raise capital for growth and investment. Unlike exchanges in Shenzhen and Shanghai’s other SSE equity markets, STAR doesn’t bar unprofitable companies or require companies to receive government approval to be listed, making it particularly ideal for startups.

Moreover, the new market also imposes no limit on the ratio of a share price to a company’s earnings at the time of listing. For some STAR companies, price-to-earnings ratios exceed 150. A larger daily limit on the price rise or decline has also been set, which means bigger price fluctuations. In its first week, the STAR Market set no limits on share prices during the first five days of a company’s trading. Meanwhile, other boards in China debuted with a cap of 44%. In future trading sessions, stocks on STAR board will be allowed to rise or fall a maximum 20% in a day to curb over-speculation, which is double the 10% daily limit for other boards in Shanghai and Shenzhen.

According to CSRC, the STAR board will welcome innovative companies in the following emerging tech sectors: information technology, smart manufacturing, aerospace, new materials, renewable energy, and biotech. With the soars in valuation and liquidity witnessed during the first week, the Star Market is likely to attract more local companies and startups. The new market is expected to draw listings from among China’s rich reserve of unicorns, privately held companies valued at $1 billion or more, including Bytedance and Didi. Although retail investors currently dominate, institutional investor participation will rise when the Star Market is included in the benchmark SSE Composite Index from January 22nd next year.

While STAR’s start has positively impacted many investors, transforming several founders into overnight billionaires as an example, it remains unclear if this honeymoon will last. STAR is Beijing’s third attempt to imitate Nasdaq, following unsuccessful experiments with Shenzhen’s ChiNext board and Beijing’s New Third Board. Once hyped with speculation when first launched in 2009, ChiNext is now struggling to gain traction. In 2018, it only saw 28 listings, with volumes falling by 43% from the previous year to US$4.3 billion. Shenzhen’s main stock exchange has not fared much better, with IPO fundraising slumping 39% in 2018 to US$8.1 billion. In Beijing, the New Third Board was set up in 2006 and has suffered a similar fate, languishing amid poor liquidity and waning investor interest. Current skepticism is prevalent as STAR’s early gains have also only been fueled by speculation. China’s exchanges are largely driven by retail investors who buy and sell on rumors. Most importantly, a significant number of the companies that have listed on the Star Market are controlled by state-owned institutions, which may not convince (mainly foreign) investors on the sidelines to get involved.

The new board is expected to continue towards an upward trajectory for some time as new investment targets are scarce relative to demand and market enthusiasm is high. But sooner or later, the market will fall back to rational levels and stock prices will reflect companies’ business performance.  Moving forward, stock performance on the new board will gradually differentiate and moves will be determined by whether companies’ business growth meets investors’ expectations.

Sources:

1. https://www.caixinglobal.com/2019-07-29/in-depth-chinas-new-tech-board-takes-off-for-long-term-mission-101444753.html
2. https://www.asiatimes.com/2019/07/article/shanghais-star-market-shows-why-china-isnt-ready-for-prime-time/
3. http://www.xinhuanet.com/english/2019-07/22/c_138247266.htm
4. https://asia.nikkei.com/Business/Markets/Shanghai-s-Star-Market-set-for-volatility-after-stellar-first-week
5. https://edition.cnn.com/2019/07/21/investing/china-star-market-tech-board/index.html
6. Image source: China Stringer Network/Reuters