What China’s Newest Tech Bourse Has Achieved So Far

(Bloomberg) -- While China has some of the world’s biggest technology companies, many are listed in the U.S. and Hong Kong. A new trading venue launched last year in Shanghai is making it easier for them to access funding at home. The Nasdaq-style SSE STAR Market has relatively relaxed rules on listing and trading that have drawn the attention of big names including Jack Ma’s Ant Group and Semiconductor Manufacturing International Corp. The result has been at times wild, demonstrating why authorities were so keen to build a testing ground before unleashing new rules on other exchanges.

1. What’s the STAR Market?

It’s “where the rising star companies cluster,” according to its website. Part of the Shanghai Stock Exchange, it has a simplified system under which tech companies and startups face less red tape in getting the nod to sell shares. The changes are aimed at lowering the wait time for approval to three months, compared to perhaps years on China’s other stock venues. The new board also 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 it as a gift to Shanghai from President Xi Jinping, who announced the plan in 2018, in line with his broader goal of boosting the city’s status as a global financial center. It’s also seen as an effort to stem the exodus of tech listings from the mainland especially as Hong Kong’s bourse opens its doors wider to such companies and the sort of dual-class listings many of them prefer. It provides another way for the government to get investors on board with Xi’s goal of championing Chinese leadership in the tech sector, and it may help insulate Chinese firms if a U.S. bill that would make it harder for some to list in New York becomes law.

3. What’s been the response?

Trading started with 25 companies on July 22, 2019, and was so frenzied that stock prices rose by an average of 140% that day. A year later, more than 130 firms were listed with a combined market capitalization of 2.5 trillion yuan ($356 billion), mostly small- and mid-size companies. IPOs generally continue to do well; SMIC surged more than 200% during its debut in mid-July.

4. Why so robust?

The high valuations could be due to the herding behavior of Chinese retail (individual) investors, who tend to rush toward the next big theme, as well as to so-called unicorns for their relative scarcity. Most STAR board listings are in red-hot sectors including semiconductors and health care. It also shows what happens when IPOs have no caps on valuations and new stocks have no limits on price moves for the first five days. Meanwhile, a rising tide lifts all boats as central bank-fueled liquidity drove a broad market rally, with many retail investors diverting bank savings and fixed-income investments into equities.

5. So how’s the pipeline?

Days after SMIC debuted, Ant Group, the parent of China’s largest mobile payment company, announced plans to list simultaneously in Hong Kong and the STAR board. The company could seek a valuation of at least $200 billion. Geely Automobile Holdings Ltd. and Covid-19 vaccine maker CanSino Biologics Inc. also plan STAR listings. Some analysts think the huge number of tech startups in China will help keep demand for the new board strong. The Haidian district of Beijing has 148,600 tech firms and will have revenue of more than 2 trillion yuan ($281 billion) by 2020, according to Minsheng Securities Co.

6. How had tech stocks been traded?

Mainly on the ChiNext in Shenzhen and the National Equities Exchange and Quotations, or NEEQ, in Beijing. The former has more than 760 members, most of them 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 major supplier of batteries to electric car manufacturers. The NEEQ sets its bar for listing much lower than the ChiNext does, with no requirement for profitability, for example. It is China’s biggest over-the-counter market with more than 9,000 companies, but trading turnover is tiny. Retail investors must have at least 5 million yuan of securities assets to participate.

7. And on the new exchange?

Investors need less upfront, 500,000 yuan, and two years of trading experience to participate. To reap the benefits of a less rigorous IPO system without encouraging financial fraud, regulators asked sponsoring brokerages to invest in the companies and lock in their capital for a fixed period of time. While unprofitable firms are allowed to list, they must meet minimum requirements for market value, revenue, research and development or cash flow. Vice Premier Liu He has said the new venue should be an impetus for reform in China’s capital markets.

8. Why now?

Rising share prices in China could boost consumer spending, which has been squeezed anew by the coronavirus pandemic, as well as make it easier for companies to raise funds and pay off debt. China is also reducing its reliance on the U.S. capital market for fund-raising amid tension between the two countries. The relaxed rules will soon be rolled out more widely, including to the ChiNext board, again testing the government’s ability to manage the market. The nation has seen two of the world’s biggest equity bubbles in the past 13 years.

9. What happened to the last big thing, CDRs?

Not much. A trial program in 2018 sought to lure Big Tech firms back with so-called Chinese depositary receipts, or CDRs, which would allow domestic investors to hold overseas-listed Chinese shares. But initial expressions of interest from the likes of Alibaba, JD.com and Xiaomi haven’t translated into action. In April 2019, the government announced a waiver on some taxes for investors in CDRs to encourage participation.

The Reference Shelf

• ‘No way I can lose!’ Inside China’s stock market frenzy.
• Xi’s surprise announcement.
• The final rules.
• QuickTakes on dual-class listings, the opening of China’s financial sector and a tally of U.S.-China flashpoints.

©2020 Bloomberg L.P.

With assistance from Bloomberg