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.
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 center of finance. 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. And it provides another way for the government to get investors on board with Xi’s goal of championing Chinese leadership in the sector.
3. What’s been the response?
Strong. Trading started with 25 companies on July 22 and was so frenzied that stock prices rose by an average of 140% that day. As of early September, shares were up 160% and the number of firms had risen to 29, with a total market capitalization of nearly $90 billion. The 25 original 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 more than 100 applications pending as of early September, mostly small- and mid-size companies.
Hard to know. The high valutions could be due to the relative scarcity of such IPOs; so far only a few dozen are trading. That suggests prices could come down to a more reasonable level once more firms enter the fray -- barring any state intervention. 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.
5. 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.
6. And on the new exchange?
Investors will 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 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, research and development or cash flow. Vice Premier Liu He said in June the new venue should be an impetus for reform in China’s capital markets. State media in August suggested ChiNext could adopt its IPO system.
7. 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, 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., has been seeking approval to list on the new tech board using CDRs.
--With assistance from Jun Luo, Benjamin Robertson and Grant Clark.
To contact Bloomberg News staff for this story: Ken Wang in Beijing at firstname.lastname@example.org;Amanda Wang in Shanghai at email@example.com;Mengchen Lu in Shanghai at firstname.lastname@example.org;Lucille Liu in Beijing at email@example.com
To contact the editors responsible for this story: Candice Zachariahs at firstname.lastname@example.org, Paul Geitner, David Watkins