(Bloomberg) -- One by one they’ve flown the coop -- Tencent, Weibo, Alibaba -- all locally cultivated technology stars that are padding returns for investors to the tune of $1.4 trillion, everywhere except China.
Together they make a bloc one-fifth the size of all the listed shares in Shanghai and Shenzhen. And more are coming: two-fifths of unicorns across the globe call China home. Their absence is sapping life from the world’s second largest stock market, leaving it clogged with state-controlled dinosaurs.
All because the government is touchy about listing anything with a high valuation or no track record of earnings.
“Domestic investors haven’t been able to share the fruits of China’s new economy and Internet sectors,” said Eric Bian, vice president of Asia Pacific emerging markets equities at JPMorgan Asset Management in Hong Kong. “Regulators should think about whether they should loosen some restrictions for the next generation of unicorns to list on the home market.”
Unlike a place like Europe, where viable tech firms rarely surface, China is awash in them, from global powerhouses like Tencent Holdings Ltd. to billion-dollar startups such as Megvii Inc., Babytree and Ele.me. What’s missing is a regulatory structure that is comfortable with younger companies. Among other barriers, candidates in Shanghai or Shenzhen must be profitable before they apply, a significant hurdle when you consider American firms like Twitter Inc. or Box Inc. are still reporting losses.
Chinese securities rules are designed to protect individuals, the majority of the nation’s equity market. They don’t permit classes of stock that give greater voting rights to founders and leaders, an impediment for Alibaba Group Holding Ltd.’s Jack Ma. New offerings are subject to a valuation ceiling -- everything prices at around 23 times earnings or less. Money stays on the table, and entrepreneurs have no choice but to see shares double or triple once trading begins.
It takes time to change rules, and officials are looking at a faster way to bring tech home: the issuance of surrogate securities that package overseas shares and sell them domestically, known as depositary receipts. The securities regulator said it’s already studying their feasibility, and some companies have expressed interest.
China’s securities regulator on Thursday approved Foxconn Industrial Internet Co.’s application to list in Shanghai, taking just weeks to complete a process that typically takes months or even years. That helped boost mainland-listed tech stocks on Friday.
The dearth of new-economy stocks in China has stood out in the global bull market, where investors worldwide piled into anything with a hint of tech. While rallies exceeding 200 percent in Weibo Corp., Alibaba and Sina Corp. enriched traders in New York, those in China could only watch as the Nasdaq Composite Index set record after record, gaining 73 percent since a low in February 2016.
Meanwhile, the Shanghai Composite Index added just 19 percent in the period. China’s ChiNext Index -- often billed as an answer to the Nasdaq -- has all but flopped, down 14 percent amid concerns over its members’ corporate governance, rising funding costs and high valuations.
While onshore investors have been able to buy Hong Kong stocks like Tencent through a connect program that started in November 2014, they’re restricted by daily quotas and a minimum account requirement. Tencent, which gets almost all of its revenue from China, is among the world’s most valuable companies.
Increasing the presence of tech in China’s equity market has been a recurring topic for officials during this week’s meeting of the National People’s Congress. The focus is on stepping up support for companies that can drive future growth as the economy, expected to decelerate in the next three years, shifts away from manufacturing.
“There’s been a change in authorities’ stance toward technology shares,” Hao Hong, chief strategist at Bocom International Holdings Co., said from Shanghai. “Encouraging entrepreneurship and technology development to regenerate the economy is one priority in policymakers’ agenda.”
It’s also a question of national pride. While China’s 28-year-old equity market is worth more than $7.7 trillion, its speculative nature has drawn criticism from international investors just as index providers prepare to include A shares in their global benchmarks for the first time.
Hosting the next Tencent or Alibaba would be a big win for the country’s onshore market, says Sun Jianbo, president at China Vision Capital.
“It would be more meaningful to catch the future giants,” he said by phone from Beijing. “It’s about having the country’s top companies listed in its own capital market. It would be a milestone.”
©2018 Bloomberg L.P.
With assistance from Sofia Horta e Costa, Amanda Wang