China’s new Nasdaq-style Star Market exchange got off to an explosive start today after it launched with an initial 25 tech company listings during the Asian trading session. Stocks newly listed on the Shanghai Stock Exchange’s new technology and biotech-specialist exchange surged by up to 500% as eager investors piled in.
Such big price swings are very unusual for stocks listed on Chinese mainland exchanges because of the ‘circuit breaker’ controls that are usually in place. If a share price moves 30% in one direction over the course of a single session, trading is suspended for 10 minutes. If, after the suspension is listed, it moves another 60%, again in either direction, a further 10-minute halt is imposed. Rules around post-IPO stocks are even stricter with share price swings capped at 44% over the first 5 days of post-IPO trading with circuit breakers triggered if swings hit 10% during a single session.
The system is designed to provide a ‘cooling off’ period that discourages technical and algo-traders that ride strong price direction trends. Trading on the basis of technical share price patterns can lead to swings that are not obviously connected in tangible way to the company’s underlying financials. The relationship between financial fundamentals and market value is one China’s financial regulators are generally keen to maintain. On all exchanges other than Star Market, IPO valuations are capped at 23 times historical earnings. After a company’s stock floats ‘freely’ on an exchange there is also the imposition of maximum price to earnings ratio.
These, along with other limitations such as the necessity for publically listed companies to gain government approval for an IPO, are thought to be among the main reasons why so many of China’s biggest and most promising technology and biotech stocks have opted to shun their domestic capital markets in favour of a Wall Street listing in recent years. The Star Market’s more relaxed approach has the backing of China’s authorities to operate by almost the same rules as the Nasdaq, which has attracted a lot of the country’s tech companies.
Based on the first day’s trading, which included 25 tech and biotech companies fresh out of their IPOs (another 119 companies are reportedly on the new exchange’s waiting list), the Star Market’s US-style approach will lead to far higher volatility than that of other Chinese exchanges. With China’s capital markets much more influenced by retail investors than is the case in the West, where institutional investors dominate, it remains to be seen just how much volatility the stripping back of the normal rules will impact volatility. Around 80% of the Shanghai Stock Exchange’s volume is retail.
The average gain from the IPO pricing of the 25 stocks that went live today was a whopping 120%. Chipmaker Anji gained 520%. While Beijing authorities are determined to convince the country’s tech companies its market reforms have their interests in mind, it remains to be seen just how much volatility will be tolerated if the first day’s violent swings become a regular occurrence on the Star Market.