Previously we wrote about the “hiccough” in Ant Group’s IPO and the motives behind and implications for the postponed mega-deal (China’s Robber Barons?). Reasonably enough all the attention was focused on Jack Ma and little attention was paid to the fact that Ant Group was planning to list on both the Hong Kong stock exchange and the debutante Shanghai STAR Market (officially known as the “Shanghai Stock Exchange Science and Technology Innovation Board”). The STAR Market is only 20 months old and was set up to attract up-and-coming companies in innovative sectors such as information technology, biotech, healthcare and robotics. Additionally, it was intended to be the market of choice for a number of “homesick” Chinese companies which have listed on overseas markets but wish to return to the motherland.
Although a newcomer, the STAR Market has experienced tremendous growth: having started operations in July 2019, it now boasts listings with a market cap of USD 431bn with more than 230 companies now listed. From a fundraising perspective, the STAR market has raised around USD 34 bn in 2020. By way of comparison, NASDAQ raised USD 77bn. In July 2020, the listing of semiconductor manufacturer SMIC marked the biggest share sale in China in a decade and the biggest IPO of 2020 globally – raising USD 7.6 bn.
In order to facilitate access to public market financing for cutting edge technological companies, the STAR Market’s listing rules provide more scope and flexibility compared to the more established markets in China – whereas pre-profit companies and those with weighted voting rights or VIE structures would have failed to qualify for a listing on other Chinese boards, the STAR Market now potentially offers them a home.
Chart 1 How STAR Market addresses the existing Chinese boards’ more rigid regulations.
The market is overseen by the SSE and the China Securities Regulatory Commission but modelled on the New York and London mainboards with a standard registration-based system adopted for all new IPOs. This means all approvals are based on facts and merit thus making political influence less prevalent. It is hoped that stock listing approvals will be quicker. Furthermore, post-IPO, the board regulates the listings by setting stricter disclosure requirements and also has de-listing rules to keep companies up to the mark.
From the investor’s perspective, the STAR Market marks the further liberalisation of China’s capital markets — compared to other mainland boards which operate a 10% daily price movement limitation, the STAR Market has increased the daily movement cap to 20%; within the first five trading days, no limitation is applied. This should appeal to the free market instincts of international investors although the potential for price volatility means that STAR is only open to institutional investors, leaving retail investors protected for their own good, for now at least.
Overseas investors can tap into China’s rapidly growing innovation scene via the Stock Connect system as long as the STAR listings are included in Shanghai’s SSE 180 or SSE 380 indexes, or if the shares are traded in Hong Kong exchange. Furthermore, as FTSE Russell and MSCI have included some of the STAR listed stocks in their respective indices, international recognition of the STAR Market will obviously increase.
A market designed primarily for high tech and innovative companies should sound familiar. Back in 1971 just such a market was launched in the US. NASDAQ now has close to 6,000 listings with a market cap of some USD 23 trillion. In the past a number of pre-profit innovative Chinese companies have been drawn to its doors. Given the US-China geopolitical tensions and the tightened NASDAQ listing requirements for Chinese companies, it seems reasonable to believe that this migration to the US will slow down. Just as significant is the Chinese Government’s policy to become self-sufficient about which we have written before (Made in China 2025). This applies as much to financial markets as it does to critical industries. With the STAR Market, companies which once left the nest may now be able to return home.
It is still too early to tell whether the STAR Market will reach NASDAQ’s scale (it is only 1.8% of NASDAQ’s market cap but that was reached in 12 months and NASDAQ has, after all, been operating for 50 years!!!), but the aforementioned listings and fundraising results have shown the capital markets in China are entering into a new stage of development. As of March 2021, the Shanghai Stock Exchange (including the STAR Market) and the Shenzhen Stock Exchange have 2159 and 2814 listings respectively; the total market capitalisation of China’s stock market has reached c.RMB 70 trillion/USD 10 trillion.
For STAR specifically, 41 of the 50 companies included in the STAR Market’s STAR 50 Index have a market cap in excess of USD 1bn (whereas NASDAQ’s small cap capital market tier has 85) and the top 10 of those listings are worth USD 157bn. PwC forecast in January over 150 companies may look to list on the STAR Market in 2021, seeking RMB 210bn plus capital (nearly double the estimated amount of fundraising by Chinese main boards).
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