Slump in China Stocks Threatens to Spoil Tech Board Plan

(Bloomberg) -- A sell-off in Chinese stocks threatens to take the fizz out of one of the country’s biggest capital market reforms in years.

Sentiment has soured just as China plans to open a Nasdaq-style board, expected as soon as June. After surging at the start of the year, the Shanghai Composite Index has tumbled more than 11 percent from an April high. It suffered its biggest loss since 2016 on Monday after U.S. President Donald Trump threatened to impose higher tariffs on Chinese imports. Worst still, given the nature of the new board, the ChiNext gauge of tech stocks fell even harder.

“The slump in the stock market will definitely impact progress of the new tech board,” said Jiang Liangqing, a Beijing-based fund manager at Ruisen Capital Management. “If the Shanghai benchmark falls below the year’s low, it might be a serious problem and may even lead a postponement of the board.”

Neither China’s securities regulator nor the Shanghai stock exchange responded to requests for comment.

Slump in China Stocks Threatens to Spoil Tech Board Plan

It’s not the first time that China’s reform efforts have encountered bumps in the road. The equity market rout last year -- when $3 trillion was wiped from the market after it hit a January high -- derailed plans for China depositary receipts, while proposals for another listing venue for so-called strategic emerging industries went south in 2016.

China is introducing the Science and Technology Innovation Board to encourage its innovative firms to list at home. Its rules are more closely aligned with global bourses, and regulators have waived restrictions on how companies are priced when they list. They’ve also limited access for retail investors who dominate the country’s equity markets.

Jiang said the restrictions on access are a concern because companies may find it difficult to attract demand from institutional investors as the market sours.

“The new board mainly focuses on technology companies, which are more vulnerable to market fluctuations compared to more established businesses,” Jiang said. “Some issuers may raise less money than planned or even fail to get deals done.”

Mark Huang, an analyst at Bright Smart Securities in Hong Kong, said the board’s prospects could be alright if the market stays in a “reasonable range.” Chinese stocks fell again Wednesday: the Shanghai Composite Index closed down 1.1 percent at its lowest since Feb. 22.

“Technology startups are driven significantly by valuations, which are mainly affected by liquidity and risk appetite,” Huang said. “Pay attention to events that may impact those, as well as economic data.”

Data Wednesday showed exports unexpectedly fell in April, while imports surprisingly grew. Inflation figures are due Thursday.

State-backed Securities Times, in a commentary Tuesday, said steady progress had been made since Shanghai stock exchange started accepting listing applications in March, though it also called for patience.

“This is a major reform, so China must try its best to ensure the launch of the new board,” said Sun Zheng, an analyst at China Development Bank Securities Co. “It is possible there will be some fine-tuning, but the pace is unlikely to be affected. This is a political task.”

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