China’s new tech market has already made three billionaires
By launching a new tech stock market, China is reminding the world of its goal to become a tech superpower. Losing top stocks to Nasdaq and other boards have caused long term frustrations for the country. They’ve been unable to stop companies from fleeing to more profitable markets.
The solution: Create a no rules, anything goes trading arena.
Why the STAR Market
The “STAR Market” opening on July 22nd defied all expectations, stunning investors worldwide.
The initial group of 25 companies saw stocks surge over 140% and $7 billion in shares traded. By the end of the day, the world had three new billionaires.
But is this growth sustainable enough to entice tech companies to return?
Investors aren’t confident, and with such a volatile market, they may be right. First-day gains were short-lived, and on the second day of trading, 21 out of the 25 companies saw their stocks fall.
No Trust in Governance
The Chinese equity markets have an image problem. They struggle with a lack of governance and missing money. In the past few months, billions of dollars have gone missing with no explanation.
China’s tech companies are choosing to bring their IPOs to safer markets. Trading in New York or Hong Kong is simply more profitable.
Trading with No Limits
One disadvantage of the Shanghai and Shenzhen exchanges is the capping of stock movements. These limits are the reason that sharp rises and drops are rare in China. The STAR Market plays by different rules. The board was approved to launch without no limits on share prices for the first five days. The lack of these limits is what propelled three businessmen into billionaire status.
Can the Frenzy Hold
According to a quote in Bloomberg by Sun Jianbo, president of China Vision Capital Management in Beijing, the answer is no. “We’ve never been in a market with no trading limits so it’s going to be a bit of a chaos in the early days of trading.”
Day two of trading saw much smaller gains, with the highest increase coming in at 14.2%.
China Railway Signal & Communication Corp saw a drop of 18.4%, the sharpest of the 25 companies.
Veteran traders aren’t surprised by the slowdown. The market is expected to decline over the next several months. Investors worry that as the stocks fall, regulators may choose to interfere. If the STAR market is going to be a true equal to the Nasdaq, the government will need to let the market play out on its own.
By the end of trading on Friday, the Star Market had still been unable to recreate its opening day gains. In an interview with Tech In Asia, Jiang Guangyuan, a large scale investor who purchased 1,000 stocks on day one, was disappointed about the lack of resilience.
“As a seasoned stock investor with more than 20 years of experience, I believed that shares of the companies would keep rising for at least five days when they started trading,” says Jiang, the former manager of a state-owned company in Shanghai. “I am currently stuck with paper losses, but still believe that the losses can be recovered in the near future.”
While there was no end of week rally, the overall performance of the market was satisfactory, with an average gain of 140% from IPO prices. The highs and lows of week one will be tempered going forward with the daily trading limit of 20% is now in effect.
Despite the uncertainty, companies are still queuing up to be part of the board, with 120 companies petitioning to join.
China is going to have practice patience if it hopes to bring home tech IPOs. Chinese high-tech leaders, like Alibaba and Xiaomi, are unlikely to be in a rush to join the STAR Market. It’s going to be an irrational and volatile market over the next several months.
Outlook: Proceed with caution.
Wang Mingli, executive director at Shanghai Youpu Investment Co told bloomberg.com,
“There’s room for some serious arbitrage with returns of five times in one day, but there’s nothing to get overly excited about just now.”