China’s tech-focused stock board, Star Market, got off to a roaring start on July 22Â as investors pushed the domestic version of Nasdaq up 140% on its first day of trading.
Part of the Shanghai Stock Exchange and known formally as the Science and Technology Innovation Board, the new market serves the double purposeOpens a new window of tapping into the growing wealth of Chinese investors, while offering a local market option for the country’s biggest tech groups such as Alibaba and Tencent that are currently listed on exchanges abroad and enabling the nexyt generation of innovative firms to obtain listings at home.
Star Market’s 25 stocks gained an average of 140% in its first session, fueled by intraday gains of as much as 520% for Anji Microelectronics Technology, a maker of semiconductor materials, which was up 400% at the close. Twenty-four shares were listed for the first time, raising $5.4 billion. Trading made instant billionaires of the founders of Suzhou HYC Technology and Zhejiang Hangke Technology.
Ignoring tech sector woes
The new exchange is riding a wave of enthusiasm for tech companies as China stakes it claim to be an industry superpower. In 2018 alone, 100 start-ups reached unicorn status with a valuation exceeding $1 billion.
Others have foundered, however, as they failed to find a business model that would produce a profit – especially companies targeting the sharing economy such as bike-sharing startups Mobike and Ofo. The trade conflict with the US has also impacted China’s tech sector, with tech exporters reportedly registering sales dropsOpens a new window of as much as 40%.
But the same irrational exuberance that has pushed up tech valuations may have driven the euphoric launch of Star Market, as analysts warn that initial gains appear too exaggerated and speculative to last. Companies listed on the Star Market were valued at 120 times earnings at the end of the first day, compared to the 24 times earnings more typical on Nasdaq or the Shenzhen tech exchange.
It was no surprise that most stocks declined on the second day of tradingOpens a new window , some by as much as 15%. Other Chinese markets restrict first-day gains to a maximum of 44%, but the Star Market had no cap on a new listing for its first five days of trading. From then on stocks will be limited to a 20% daily trading range.
Strategic sectors of the future
President Xi Jinping announced the new Shanghai tech board less than a year ago as part of China’s effort to become less dependent on foreign capital. The ongoing trade dispute and the US ban on Huawei have intensified these efforts.
The Star Market is focused on half a dozen emerging industries of strategic significance, according to the market regulator: next-generation information technology, smart manufacturing, aerospace, new materials, renewable energy and biotech. The initial group includes chipmakers, AI companies, biotech firms, electric car battery makers, and suppliers for high-speed trains. The board has a waiting list of more than 100 companies.
The market itself is innovative in introducing a US-style initial public offering in a streamlined format that doesn’t require government approval. It allows companies operating at a loss to list, and permits dual classes of shares and weighted voting rights. It has circuit breakers to slow down surges in trading — though these did little to halt Anji’s meteoric ascent.
Third time pays all?
Two previous attempts to launch a Nasdaq-style market in China, in 2009 and 2013, ended in failure and skeptics believe the same thing could happen this timeOpens a new window . China’s tech giants are unlikely to return home because they like raising funds abroad, beyond the reach of Beijing’s strict capital controls.
However, not only has the quality of listings improved this time, but the Star Market is backed publicly at the highest political level. It’s a brick in the ambitious “Made in China 2025†program to upgrade the country’s industry and make it dominant in tech.
Listings on the Star Market align closely with these objectivesOpens a new window . The program sparked such concern abroad when it was introduced in 2015, raising worries about international trade rules as well as security, that top officials have subsequently soft-pedaled references to it.
But the launch of the new market indicates that the strategy is alive and well.
The government is backing tech development with direct support in the form of state funding, low interest loans, tax breaks and other financial assistance. This support is expected to run into hundreds of billions of dollars.
Making the world big enough for China and US
The threat to US national security has been a preoccupation of the Trump administration, and accounts in part for Washington’s more aggressive opposition to China’s technology transfer obligations on companies entering its market and government-backed acquisitions.
Beijing has attempted to deflect some of this criticism by gradually opening up its capital markets and paving the way for a more international role for its currencyOpens a new window , the remnimbi.
Both China and the US are under pressure to resolve their trade dispute, which will require accommodation for Huawei and other tech exporters. The US has already made some moves in this directionOpens a new window  and further progress toward defusing the trade confrontation could help to maintain enthusiasm among Star Market investors.