1. What’s the new market?
Twenty-five companies started trading on the SSE STAR Market, part of the Shanghai Stock Exchange, on July 22. Under the technology board’s simplified system, firms face less red tape in getting the nod to list. That change is aimed at lowering the wait time to three months compared to perhaps years on China’s other stock markets. The new board also removes limits on the pricing of IPOs and eliminates caps on first-day trading gains. As it happened, trading was so frenzied on July 22 that the 25 stocks rose by an average of 140%.
Market observers have been interpreting this as a gift to Shanghai from President Xi Jinping, who announced the plan in November, in line with his broader goal of boosting 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 wider to biotech firms 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 championing Chinese tech companies.
3. What was the initial response?
Overwhelming. The 25 companies raised about 20% more than planned during their IPOs. Offer prices averaged 53 times reported earnings, more than double the unwritten cap of 23 times on other boards. The bourse had accepted applications from more than 140 firms as of July 18, most of them small technology companies or startups. Some analysts see strong demand for the 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 ($291 billion) by 2020, according to Minsheng Securities Co.
4. How have tech shares been traded?
The main domestic trading venues for China’s technology companies are the ChiNext in Shenzhen and the Beijing-based National Equities Exchange and Quotations, or NEEQ. 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 some 9,800 companies, but trading turnover is tiny. Retail investors must have at least 5 million yuan of securities assets to participate.
5. What’s happening with CDRs?
Not much. The trial program was started in 2018 to allow big tech firms domiciled overseas to sell yuan-denominated securities in China, but so far there haven’t been any takers. Alibaba Group Holding Ltd. and JD.com Inc. have put their CDR issuance plans on hold, and smartphone maker Xiaomi Corp. opted for a Hong Kong share sale. In April, the government announced a waiver on some taxes for investors in CDRs to encourage participation. Ninebot Ltd., owner of the electric scooter maker Segway Inc., sought to list on the new tech board using CDRs, but those plans have been suspended.
6. What are the rules for the new exchange?
Investors will need half a million yuan and two years of trading experience to participate. To reap the benefits of a less rigorous IPO system without encouraging financial fraud, regulators have 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, R&D or cash flow.
--With assistance from Jun Luo, Benjamin Robertson and Grant Clark.
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