China: A Star Market is born

ChinaThe first day of trading on Shanghai’s answer to Nasdaq saw fireworks as all 25 companies listed on the Science and Technology Innovation Board, or “Star Market”, rose sharply. Trading gains on the first day ranged between 80% and more than 500% – but the Star Market’s success will not be measured by short-term performance, asset managers warn. Announced by President Xi Jinping during a visit to Shanghai in November 2018, the initiative has been set up with tremendous speed as it aims to strengthen China’s financial markets, making it an attractive financing option for dynamic Chinese companies while offering foreigners investment opportunities. Caroline Yu Maurer, head of greater China equities at BNP Paribas Asset Management, Lynda Zhou, a portfolio manager at Fidelity International and Michelle Qi, chief investment officer for China equities at Eastspring Investments share their views on the market’s debut and what it could mean for investors going forward with Funds Global Asia. “The idea behind this new technology board is to encourage investment in domestic tech innovators and attract more capital to invest in domestic markets by optimising the investment universe with more new economy companies,” said Maurer. “It has taken on added significance as intensified trade tensions with the US has negative impact on the China’s technology’s supply chain.  It also serves as an alternative option for technology companies should US further tighten up the access to its domestic equity market even if the risk remains remote for now,” she added. What’s different about this market?
Commenting on what makes this market different, Fidelity’s Lynda Zhou said: “Regular A-share IPOs in Shanghai and Shenzhen are approval-based. All new offerings are priced at a maximum of 23 times earnings, are heavily oversubscribed, and most allocations go to retail investors. An initial IPO ‘pop’ is taken for granted among mainland investors: shares commonly rise by the daily trading limit for days or weeks after they begin trading. “By contrast, Star Market IPOs are registration-based. Deals go through a more conventional book-building process to arrive at a market-based valuation. The majority of IPO allocations will go to institutional investors, and there are no hard limits on trading in the first five days – although circuit breakers can lead to a temporary pause in trading. “Multi-tiered share structures (such as those favoured by tech companies listing in the US) are permitted, and companies won’t be subject to the usual 3-year profitability requirement. Retail investors need to have a minimum level of trading experience and at least 500,000 renminbi (about $72,600) in their broking account,” added Zhou.  Noting that these are radical changes for the country’s capital markets, Zhou said: “For China, the Star Market aims to keep innovative companies at home, but also to help institutionalise and professionalise the country’s homegrown equity markets by reducing short-term speculation. Market-driven reform mechanisms included in the new board’s IPO and trading regime are key to this push, but success will require changing mindsets too.” AI ambitions
With China’s sights set firmly on becoming a global leader in artificial intelligence (AI) by 2030, Star is aimed at attracting and financing innovative companies, including those in high-end equipment, biotechnology and healthcare, IT, new materials, renewable energy, energy saving and environmental protection, who will drive China’s future AI competitiveness, explained Eastspring Investments’ Michelle Qi. “Star will become a platform for such unicorns to list and raise funds at home,” said Qi. “Moreover, the latest trade spat with the US and the US curbs on its Chinese technology companies may push the Chinese government to extend more support to the domestic high-tech firms, i.e. provide greater access to funding through Star. Due to Star’s national-strategic importance, the Chinese government will do its best to ensure all reforms be carried out in an effective manner,” she added. If successful, aspects of reform or the experience such as market pricing and wider trading limits could later be applied to traditional boards. “For corporates, this will mean greater access to funding,” said Qi. “It will help to rebalance the economy from an indirect-financing to a direct-financing mode; the gearing ratio of Chinese corporates have been much higher than that of US over the years. In terms of percentage of GDP, however, the non-financial corporate debt of US and China was 143% and 74% respectively as at end of 2018. “For equity investors, these reforms result in a larger investable universe. It will not only attract more global investors into the onshore market but also provide more investment options for onshore institutional investors such as the pension funds and asset managers, to diversify their investments for a better risk-return profile,” Qi concluded. ©2019 funds global asia

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