More than 100 firms have applied to list on the STAR market, which is expected to channel billions to the tech sector. China's past failures at creating its own Nasdaq are prompting some investors to tread with caution.
China's homegrown technology startups will now be able to list on a Chinese stock exchange specially designed for them and modelled on the Nasdaq.
Trading starts on Monday on the Shanghai Stock Exchange's new Science and Technology Innovation Board, also called the STAR market, one of President Xi Jinping's pet projects. The first batch of 25 companies — ranging from microchip makers to biotech firms — has been approved to debut on the new exchange.
The STAR market is one of China's boldest moves at reforming its capital markets to make it easier for tech startups to raise funds at home and to ensure that the next Alibaba or Baidu do not flock to exchanges in the US or elsewhere. It is also a part of Beijing's desire to become technologically self-reliant at a time Chinese tech firms such as Huawei have been targeted by the US, allegedly to extract trade concessions.
More than 120 tech companies have already applied to list on the new exchange. They are aiming to raise a combined $16 billion (€14 billion), the Financial Times reported. Initial public offerings (IPOs) on the main Shanghai Stock Exchange raised over $10 billion last year, while those on the Shenzhen exchange raised $7.4 billion, according to data provided to DW by Refinitiv.
The STAR market has already sparked a frenzy among Chinese investors. The first batch of companies to list raised a combined $5.4 billion, 20% more than expected. The companies commanded lofty valuations, including one that priced its shares at 171 times earnings. That contrasts with valuations of 33 times earnings for similar stocks on other Chinese stock markets, Bloomberg said.
Retail investors have been particularly enthusiastic. The initial public offerings were oversubscribed nearly 1,700 times among retail investors, despite concerns about staggering valuations.
Regulators have relaxed several rules for the stocks listing on the SMART market.
In a first for China, even unprofitable companies will be allowed to trade on the exchange, a major boost for startups looking to tap public markets to fund their growth plans. The Shanghai Stock Exchange requires a company to post profits for two years before it can list.
Allowing companies to sell shares before they are profitable will encourage development of Chinese venture capital by allowing early investors to recover some of their money, economist Lu Zhengwei at Industrial Bank in Shanghai told the Associated Press news agency.
There will be no daily price limits during the first days of a company going public, following which stocks will be allowed to move in a range of +20% to -20% in a day. At other Chinese stock markets, price gains are capped at 44% on debut, followed by a 10% cap in either direction.
Share prices on the STAR market will be allowed to swing by 30% before they will be subjected to a 10-minute trading halt. The exchanges in Shanghai and Shenzhen halt trading in a stock if its price rises or falls 10%.
Three times lucky?
Beijing's past two attempts at creating its own Nasdaq have been disappointing.
The Shenzhen Stock Exchange's tech-heavy ChiNext board, which was launched a decade ago, has seen its market value and trading volume fall sharply in recent years, hurt by speculation and corporate cheating.
An over-the-counter equity market, the New Third Board, has also been similarly abandoned by investors and issuers.
Luo Huasen, the chairman of Shanghai Hengsui Asset Management, told Reuters that he had no plans to venture into STAR, at least initially, especially after witnessing the fate of ChiNext.
"I suspect the craziness of this market will be beyond my understanding," Luo said. "I will stay on the sidelines."