A Rising Star: China’s Nasdaq-style board, “Star market”, opens

July 30, 2019

3 min read

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What's going on here?

China recently launched its most liberal and independent exchange for tech firms, called “Star market” that will allow tech firms and start-ups to have the opportunity to list without seeking approval from the government regulator.

What does this mean?

After its announcement last year, there has been great expectation around the new and, for China, strikingly liberal “Star market” exchange, which has the Chinese President’s strong backing. Companies do not require any government approval, nor do they need to have made any money before listing. In addition, there is no limit to the P/E ratios (price to earnings ratios – i.e. how the share price compares to a company’s earnings) of listed firms.

With 149 tech firms signing up to list on the “Star market”, the first 25 firms reaped the benefits of being the first to participate in the opening of this new exchange on 22nd July. Despite the requirement of two years of experience and a minimum of $103 000 accessible in a trading account, eligible investors piled in: it raised a total of $5.4 billion, made three tech CEOs billionaires, and the biggest winner’s shares climbed to over 400%.

Bloomberg reported that the launch had even exceeded the high expectations by 20% with a large P/E ratio of 53.4. This is partly due to a special rule that removed the usual 44% caps in first-day gains for the first five days of the new exchange, with only circuit breakers (that halt trading for 10 minutes if there is a rise of 30%) to stagger the flood of trades. Afterwards, to ensure stability is maintained following the exchanges’ stellar rise, there will be a cap of 20% on price fluctuations.

What's the big picture effect?

This is another huge step for China in opening up trade and encouraging flourishing markets in the country. By establishing this new exchange for tech firms, China is encouraging them to list in China instead of other foreign exchanges such as the Nasdaq, the New York Stock Exchange and the Hong Kong Stock Exchange. This comes as part of China’s President Xi Jinping’s “Made In China 2025” initiative and his five-year plan to establish China as a market leader that will dominate high-tech industries.

The kinds of companies that have profited from this move are electric-car battery makers, AI and biotech firms and chipmakers, who in the past did not seem attract as much in investment. This lack of faith is why the 2009 and 2013 attempts at creating a Chinese rival to Nasdaq had failed. But now there is more faith in China’s tech firms, with polls stating that 65% of the Chinese population see AI and robotics as beneficial, much higher than the global average of 29%. Moreover, Chinese tech firms often struggle to reach their full potential after listing on foreign exchanges as they are less familiar to potential foreign investors.

In the context of economic tension between the US and China, we have already seen cases of loosening regulation for the Hong Kong stock exchange which has recently seen Alibaba apply for a second listing. Hence this is a geopolitical move to boost investment in China as opposed to American stock markets.

However, with a huge average growth of 140% per company on Star market, many ask if this exchange can be stably maintained. Similar Chinese exchanges such as ChiNext (an exchange for small tech firms) have petered out and sit well below their early valuations. This being said, with Xi Jinping’s backing and stronger gains than expected in the opening days of the new exchange, there are some clear signs that it will continue stably after the opening fireworks are over.

Report written by Will Holmes

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