But the countrys answer to Americas Nasdaq is not for the faint of heart

Jul 22nd 2020

SHANGHAIS STAR market, a stock exchange for Chinas home-grown technology firms, celebrates its first birthday today. It has much to cheer about. Launched with an ambition to rival Nasdaq, a venue in New York where many American tech giants are listed, the toddler has surpassed the older ChiNext exchange in Shenzhen and already ranks second globally by capital raised in IPOs so far this year. And it just received a lovely present. On July 20th Ant Group, the financial-services arm of Alibaba, an e-commerce giant, said it had chosen STAR as one of two exchanges on which it is planning its long-awaited listing (the other winner is Hong Kong, which has also grown popular among fast-growing Chinese companies). Though the exact size and timing of the offering are still unknown, it could well turn out to be the largest IPO ever. Ant was last valued at $150bn in 2018; listing even a small portion of its shares could place it above Saudi Aramcos IPO last year, the largest yet at $26bn.

Two factors explain STARs appeal to issuers. First, it enjoys rock-solid political backing. Chinas government sees it as a way to channel capital towards young technologies it wants to nurture, from high-tech sensors to quantum computing. To help money flow, it has loosened restrictions that apply to stock offerings elsewhere (eg, on other Chinese exchanges, an informal price cap of 23 times earnings and a 44% ceiling on first-day gains). It has also fast-tracked IPO approvals, which can take years on other exchanges. Second, the mood has soured against Chinese companies in America, where many promising companies from the mainland would have traditionally considered listing. America has threatened to impose sanctions on Chinese officials. Earlier this year, the Senate also passed legislation that could force American-listed Chinese firms to delist if they fail to show their audit work papers to American regulators for three consecutive years. That makes Asian alternatives more palatable.

It helps that investors like STAR too. Some offerings have attracted orders amounting to thousands of times the quantum of shares up for sale; some stocks have rocketed tenfold within hours of listing. But STAR is not for the faint-hearted. The prices of shares listed there are sometimes way off those of similar securities listed on more mature markets, hinting that they may be divorced from company fundamentals. The Shanghai price of Semiconductor Manufacturing International Corporation, a chipmaker that raised 53.2bn yuan ($7.6bn) in early July through a dual IPO, is more than three times its Hong Kong price, for example. Such inconsistencies can exist on the way down, as well as on the way up. As investors sell older stocks to pile into the newest and flashiest offerings, prices can slide by double-digit percentages, suggesting the market may not have the liquidity yet to absorb large IPOs in quick succession.

This creates a conundrum for Chinas rulers. Investors positive reaction to STAR may prompt regulators to ease stockmarket rules on other mainland exchanges, leading to more efficient, liquid markets and allowing the government to funnel capital to strategic sectors. But untamed speculation by fickle punters makes bubbles more likely, and the political, PR and financial risks of market crashes rank among the things that keep Chinas masters awake at night. If it proves little else than a fashionable casino, STARs allure could dim fast.

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China's newest technology stock exchange is thriving despite the pandemic - The Economist