China’s Mega Listings Intensify Rivalry Between Stock Exchanges

(Bloomberg) -- Ant Group Co.’s highly-anticipated initial public offering in Shanghai is set to intensify rivalry between the bourse and its competitor Shenzhen, as both aim for the top spot in China’s $9.9 trillion equity market.

The megacities house two of the world’s largest 10 stock-exchange operators, and have for decades jostled to become the go-to destination for firms wanting to open their doors to retail and institutional investors alike. Together they make up the world’s second-most valuable national equity market globally after the U.S. A rally in mainland China has added $2.6 trillion to stock values this year alone thanks in part to Beijing’s policies to encourage trading.

While the Shanghai Stock Exchange has been the default bourse for large state-backed corporations, it’s fallen behind in stature in recent years as investors chase multibillion-dollar tech listings in Shenzhen. The southern city’s proximity to Hong Kong, coupled with its plentiful high-growth firms, has made it attractive to more risk-tolerant and international investors. Its ChiNext index has outperformed major global peers this year, leaping by nearly 50%. The Shanghai Composite is up nearly 6%.

“There is rivalry in the sense they want to get good listings, but there’s a push and pull, things are going to bounce backwards and forwards between the two,” said Fraser Howie, author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise”.

From the start, the rivalry between Shanghai and Shenzhen was basically one of state-owned firms and private firms. That scale tipped after policymakers encouraged the development of private enterprises, he added.

With several mega-listings set to hit in coming weeks and months, including automaker Zhejiang Geely Holding Group Co. and China International Capital Corp. - both wins for Shanghai’s Star board - competition between the two bourses is sure to heat up again.

Representatives from the Shanghai and Shenzhen stock exchanges could not be reached for comment when contacted by Bloomberg News.

History

To understand the relationship between the two exchanges, analysts point to their roots. Both Shanghai and Shenzhen’s stock markets launched in 1990 as a result of growing economic activity, though the bourses tapped into very different business sectors. Shanghai, a politically-linked business hub, thrived with large state-owned firms and factories in the key Yangtze Delta region. Smaller, private firms turned to the industrial center of Shenzhen.

Those roles reversed when pure state-owned businesses started to decline following the introduction of mixed ownership in the early 1990s. This was further championed by President Xi Jinping when his administration made private investment in state businesses a key part of its 2013 plan to expand economic freedom. Growth in the private economy has since eclipsed state-controlled behemoths.

In recent years, the offerings from the exchanges have been closely matched. In a bid to reinvent itself to appeal to more firms, Shanghai launched its own Nasdaq-like Star Market last year. It offered lower revenue and market cap requirements for companies to list, while also accelerating the years-long review period to just months.

Shenzhen’s ChiNext, trying to establish itself as a reliable rather than speculative platform, has also implemented similar IPO requirements while also lifting daily price limits. In August, 18 firms trading for the first time on the ChiNext board under new reforms saw shares surge by an average 212%.

Ant Group’s decision to list in Shanghai is a major win for the bourse. Turnover on the Shanghai Exchange is only about two thirds of that of its southern counterpart, even though its market cap is about a third larger. Meanwhile, the value of stocks traded by overseas investors in Shenzhen is nearly six fold compared to Shanghai.

The rivalry may intensify, after regulators signaled that trading rules could soon be eased for all domestic exchanges. As China seeks to lure high-growth companies to its borders, it could put Shanghai and Shenzhen in a global race with the biggest exchanges from New York to Singapore. Ant, for example, is also listing in Hong Kong.

“I think the real rivalry is with international exchanges - Hong Kong, Singapore, and even more so Nasdaq,” said John Dong, securities attorney at Joint-Win Partners in Shanghai. “Trying to attain small tokens of favor from authorities is losing sight of the goal to strengthen China’s capital markets and win over international funds.”

©2020 Bloomberg L.P.

With assistance from Bloomberg