Star Market, the new tech-focused exchange operating under the Shanghai Stock Exchange, that China hopes will both encourage domestic investors into local tech stocks and take business from the Nasdaq and Hong Kong, will launch on Monday. 140 Chinese tech and science companies have agreed to list on the new exchange but Monday’s soft launch will include just a ‘first batch’ of 25, reports the Financial Times.
It’s not the first time that China has tried to encourage its major technology companies to raise capital domestically rather than decamping to Wall Street. However, previous efforts have not had the desired effect and the giant Asian economic powerhouse is still seeing many of its biggest tech names, from Alibaba to Baidu and China Telecom choose to attract investors on the major U.S. exchanges.
However, it is hoped that Star Market’s new, more flexible approach to public listings will encourage more to remain at home, raising finance on the domestic capital markets. The U.S.-China trade war has made that a priority for the country’s authorities and the new facility has the backing of President Xi Jinping.
Star Market’s listing conditions are more flexible than the main Shanghai and Shenzhen exchanges. To list on those a company needs to secure government approval. Companies also need to profit making, which is often not the case for quickly growing technology companies, which often take the strategic decision to cover losses from investment capital as they try to quickly grow market share. There will also be no limit over the share price to earnings ratio of companies listed on the Star Market – something which is controlled on the Shanghai and Shenzhen bourses. IPO valuations are capped at a multiple of 23 times historic earnings.
Another key difference for companies listed on Star Market will be the ability to issue dual-class shares. The founders of publically listed tech companies often wish to retain control over operations and do so by selling shares with diluted voting rights. Their own shares carry several votes each, allowing them to maintain control despite only owning a minority ownership stake.
The new exchange’s benefits are also not only weighted in favour of companies that choose to list there. It will allow investors to short stocks, something which until now has not been possible on the mainland China exchanges.
The companies that have chosen to list on Star Market have already taken advantage of its specialised rules. The average P/E ratio of the first 25 companies to go live is above 53, compared to just under 14 for the companies listed on the main Shanghai Stock Exchange.
The eyes of international investors will be on Star Market on Monday despite the fact that none of the original 25 companies whose stocks will float at the beginning of next week is particularly well known outside of China. Of particular interest will be how the market reacts to the 5-day removal of the normal Chinese ‘circuit breaker’ which suspends trading if a stock’s price moves by more than 30% during a single trading session. Normally, if that happens trading is suspended for 10 minutes. If there is a further move of at least 60%, in either direction, after trading resumes, the stock is suspended for another 10 minute ‘cooling off’ period. However, on the Star Market there will be no control of stock price movements over the first five days, with the usual mechanism only being introduced after that.