The Shanghai Stock Exchange’s STAR Market trading started on Monday. China is ready to be a game-changer in stock-market sector
A “Star is Born”. On the morning of July 22, at the hall of the Shanghai Stock Exchange, the Science and Technology Innovation Board (STIB) was officially launched, with 25 companies beginning trading. Lianxun Securities estimate that the median R&D to total revenue ratio for STIB listed companies is around 10.2 percent, compared to the median for the Growth Enterprise Market(GEM) Board, which is just 5.2 percent.
©Bloomberg. The launch ceremony of the STAR board in Shanghai on July 22
The new board is not only a key initiative by PRC to provide domestic funding support to Chinese hi-tech and innovative start-ups, but is China’s last attempt to regulate finance sector. Just eight months after Chinese President Xi Jinping unexpectedly announced plans for a new share board for the freer trading of technology stocks, the NASDAQ-stile board is ready to change, and regulate, finance sector in China.
China’s equity markets are the second largest in the world, but they’re often prone to speculative activity and lack of governance.
What’s the plan? Based on the two previous failures of the “Strategic Emerging Board” and “Technology Innovation Board”, the new board is expected to become the Chinese version of NASDAQ, aiming to support the growth Chinese hi-tech and innovative start-ups, allowing “New Made in China” products to compete on a global level in areas such as microchips, self driving cars and automation and promote the reform of China’s capital markets.
According to Bloomberg, endorsement from top officials helped generate such enthusiasm that firms raised a combined $5.4 billion, about 20% more than planned. Demand from retail investors has outstripped supply by an average 1,800 times, even as some analysts voiced concern over lofty valuations.
“Gains were much stronger than expected, either due to unreasonable IPO pricing or speculative trading,” said Zhu Junchun to Bloomberg, a Shanghai-based analyst with Lianxun Securities. “It’s going to be a liquidity game in the first half year or one year of trading. Judging by the trading activity and gains on the board, it’s definitely a success.”
©Getty Images. Yi Huiman, CSRC’s Chairman, presides over the launch ceremony Nasdaq-style tech board during the 11th Lujiazui Forum 2019 on June 13, 2019 in Shanghai, China.
Thus, why the new rules decided by Chinese authorities in finance sector will, maybe, change the stock-market game in Asia? The STAR Market’s rules mark a bold change from current practice in China but whether it will truly bring about a new era for the country’s stock markets remains to be seen as the specters of fraud and speculation dog domestic companies as much as ever.
Beijing hopes new NASDAQ-style board will persuade promising local companies to list at home rather than in the US while also providing a test bed for broader stock market reforms. Over the past 20 years, Chinese tech companies like Baidu, Sina, JD and Alibaba have chosen New York (or Hong Kong) for their initial public offerings. Sixteen Chinese companies have listed in the US so far this year, with more in the pipeline, attracted in part by the prospect of escaping the clutches of Beijing’s capital controls. The most crucial change is the adoption of a registration – base listing system, which replaces the pronged regulatory vetting that kept many companies waiting for more than a year before listing.
The board is also a testing ground for regulators, who have waived rules on valuations and debut-day price limits for the first time since 2014.
Limits on IPO pricing, common to other Chinese exchanges, have been waived, with price instead to be determined based on indicative orders from institutional investors. STAR market candidates also do not need to show they have been profitable for at least three years, opening a listing path for high-growth startups that have yet to post positive net income. How does the fact that the Chinese exchanges are approval-based, and not registration-based, affect listings?
In details, as SCMP revealed, unprofitable companies that have a minimum of 300 million yuan ($US44.6 million) of sales in the previous year are also eligible to file an IPO application. Pre-revenue biotech firms that have a market value of at least 4 billion yuan (US$595.5 million) are also eligible if they obtain licences from the national drug authorities. Of course the Shanghai exchange will review IPO applications, conducting a careful screening on earnings and operations before granting share listing approvals.
First 25 IPOs jump an average 148%, with volume surging. Shanghai tech board opens door to broad China IPO reform. STAR Market can bring change if it steers past fraud, red tape and speculation.
Such measures are welcome and long overdue. IPO reforms like this have been on Beijing’s radar for over a decade. Foreign investors will be able to buy into STAR stocks through China’s various Qualified Foreign Institutional Investor programs but not the Shanghai-Hong Kong Stock Connect market link. For now, the new board is to be primarily a domestic matter.
In terms of regional distribution, 56% of the first batch of listed companies are located in Beijing, Shanghai and Suzhou, with five in Beijing and another five in Shanghai. Four are located in Jiangsu province, with three companies in Zhejiang province, three in Guangdong province, two in Shaanxi province, and one each in Shandong, Heilongjiang and Fujian.It is reported that the total financing capital of these 25 companies amounted to 37 billion yuan. Among them, the capital raised by 20 of the companies ranges between 0.5 to 1.5 billion.
©Unsplash. In recent years, China witnessed a huge growth of industries dedicated to the development of AI, reaching the number of 4040 AI companies in May 2018, whose 26% is located in Beijing.
China Railway Signal & Communication (CRSC), a Chinese company specialized in train control systems, topped the chart with 10.5 billion yuan, far exceeding the runner-up, Montage Technology,which focuses on supplying analog and mixed signal chips.
But will the new hi-tech board be able to avoid dubious Chinese business practices? Nevertheless the general excitement, there are still doubts over execution, timeline and core criteria of this new board. Without doubt People’s Republic new Nasdaq-style tech board will be a game-changer. The new rules already fuleded hopes among players and investors. But, without doubts, US stock market is still by far for Shanghai new board. Hong Kong might be a more realistic goal, but maybe the final result will be a hybrid system where investor will face a kind of “approval based” system, but probably not so strict as the A-share market.
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