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Chinese Tech Companies Get a New Exchange in Shanghai

Chinese Tech Companies Get a New Exchange in Shanghai

(Bloomberg) -- While China has some of the world’s biggest technology companies, many are listed in the U.S. and Hong Kong. First, there was a push to lure companies back with so-called Chinese depositary receipts, which would allow domestic investors to hold overseas-listed Chinese shares. Now, President Xi Jinping is touting the launch of a new trading venue in Shanghai that will make it easier for high-tech companies to access funding. The new bourse will relax rules on listing and trading, moves that Chinese leaders hope can one day be extended to other exchanges.

1. What’s the plan?

The Science and Technology Innovation Board is intended not just for tech firms to raise funding but also to streamline the process. The securities regulator currently uses an approval-based system for initial public offerings, which usually takes months to years to complete. The technology board is registration-based, meaning the vetting process would be simplified and companies would face less red tape, speeding things along. The new board removes limits on the pricing of initial public offerings and eliminates caps on first-day trading gains.

2. What’s the rationale?

Market observers have been interpreting this as a gift to Shanghai from Xi, who announced the surprise plan in November, in line with a broader goal to boost the city’s status as a global center of finance. It’s also seen as China’s latest effort to stem the exodus of tech listings, especially as Hong Kong’s bourse opens its doors to biotech firms with no record of profit or revenue as well as to tech-friendly dual-class listings. The move can also be interpreted as the government getting investors on board with Xi’s goal of making China technologically independent.

3. What’s been the response?

Optimism about the venue has boosted the shares of Chinese brokerages. The bourse has accepted applications from over 30 firms as of April 1. However, some investors seeking high-profile technology unicorns and large issuers appeared unimpressed by the first batch of applicants, pushing the regulator to urge patience. Some analysts see strong demand for a new board because China has a huge number of tech startups. The Haidian district of Beijing has 148,600 tech firms and will have revenue of more than 2 trillion yuan ($288 billion) by 2020, according to Minsheng Securities Co.

4. How are tech shares currently traded?

The main domestic trading venues for China’s technology companies are the Nasdaq-style ChiNext in Shenzhen and the Beijing-based National Equities Exchange and Quotations, or NEEQ. The former has 749 members, and most are small technology firms with a track record of profitability at the time of listing. A good example of a ChiNext stock is Contemporary Amperex Technology Co., a maker of batteries that is a major supplier to electric car manufacturers. The NEEQ sets the bar much lower for listing than the ChiNext does. There’s no requirement for profitability, and retail investors must have at least 5 million yuan of securities assets to participate. China’s biggest over-the-counter market has some 10,400 companies, but trading turnover is tiny.

Chinese Tech Companies Get a New Exchange in Shanghai

5. What’s happening with CDRs?

Good question. While little has been said about the idea to allow overseas-listed companies to sell yuan-denominated securities in China since a trial program was announced in June it looks like they are being entertained in some form. The government announced mid-April a waiver on capital gains taxes for investors in CDRs. Soon afterward, Ninebot Ltd. applied to list on the tech board through the issue of Chinese depositary receipts.

6. What are the rules for the new exchange?

The Shanghai Stock Exchange rolled out rules for the technology trading venue in March. Investors will need half a million yuan ($66,000) and two years of trading experience to participate. To balance the benefits of a less rigorous IPO system with the desire to rein in financial fraud, regulators have asked sponsoring brokerages to invest in the companies and lock-in their capital for a fixed period of time. Exchange officials say they will limit the review period for IPO applications to three months. While unprofitable firms are allowed to list, they must meet minimum requirements for market value, revenue, R&D or cash flow.

The Reference Shelf

--With assistance from Jun Luo and Benjamin Robertson.

To contact Bloomberg News staff for this story: Ken Wang in Beijing at ywang1690@bloomberg.net;Amanda Wang in Shanghai at twang234@bloomberg.net;Mengchen Lu in Shanghai at mlu157@bloomberg.net;Lucille Liu in Beijing at xliu621@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Philip Glamann, Grant Clark

©2019 Bloomberg L.P.

With assistance from Bloomberg