Shanghai turns off new technology in Nasdaq style

China is again trying to increase the credibility of the volatile stock market.

On Monday, China launched a new technology in the Nasdaq style ̵[ads1]1; Science and Technology Innovation Board, or "STAR Market" where 25 companies were listed, as the country is trying to solve investor problems such as market volatility and lack of governance.

China has the world's second largest stock market, just behind the United States. More foreign capital is expected to float to mainland Chinese stocks with inclusion in large investment indices.

But participation in retail has been relatively high, which leads to a lot of speculative activity that has led many to call China's stock markets into a casino.

Control is also missing. In recent months, some major listed companies have reported criminal arrests or disappeared by billions of dollars that cannot be explained.

Meanwhile, Beijing will also keep its best companies listed at home. The country has produced some of the world's largest technology companies, but they have chosen to translate. This is due, among other things, to strict profitability requirements at home, and the brand credibility offered by markets such as New York or Hong Kong.

China's top securities regulator Yi Huiman has billed the new corporation as a pilot program, trying out new practices before implementation elsewhere.

Focus is on valuable industries with high growth potential, such as high-tech equipment production and biotechnology. The board also establishes a domestic investment channel for companies operating in areas of national security that cannot receive foreign capital.

Some of the main features of the board are:

• Allowing some companies of a certain size to list before they have earned profits
• Make it easier For a company to become public by relying on a registration, instead of waiting for regulatory approval – 57 companies were announced on the Shanghai A share market last year, against 143 in the Hong Kong headquarters, according to PwC.
• Required that some investors have assets of at least 500,000 yuan ($ 72,655) that can be invested and two years of securities trading.

All This sounds promising, except that it is the third time in 10 years that China has established a new large stock market. The last time was in 2013, when over-the-counter New Third Board started operations. In 2009, ChiNext was launched in Shenzhen. Nor has it been able to achieve the same investor interest as the primary A-share market.

Many Chinese venture capital firms and other primary market investors are vigorous about a new platform that makes them easier to get out of investment and on high valuation. The China Equity Strategy team at UBS Securities pointed out in a note that the implied average price-to-profit for the first group of companies is 53, against 49 for the ChiNext index.

But many investment funds prefer to wait and see if the new board will live up to expectations before commenting or participating.

The most critical thing the Sci-Tech's innovation board is heading for is public support from Chinese President Xi Jinping, who announced plans for the board last November. Supervisors and market participants took over half a year to put everything together on Monday's listing. The question is how much of the momentum will continue.

"China is centralized, different from the US and Europe. This is a completely different situation given the Chinese financial market development, but I think it is meaningful," says Andy Nybo, director of Burton-Taylor International Consulting, who conducts financial market research. , political forces, will try to influence and support (the board) to see that it is a successful initiative. "

The new corporation is entering Beijing's general efforts to build its domestic financial System, which has far less international clips than the general economy. China's stock market, in its modern extradition, has existed for less than three decades, while the history of the New York Stock Exchange traces back more than 200 years.

"(In China ) we will probably move from a world of mostly loan-based financing to slightly more capital markets – based funding, "Peter Reynolds, partner at managem ent consulting firm Oliver Wyman. "This journey requires some infrastructure to sit under it, and some of that infrastructure can now be developed and tested."

As an experiment, the Sci-Tech Innovation Board is quite small from a relative capital perspective. During Monday's launch, the 25 companies were expected to increase 37 billion yuan, according to a report by the state news agency Xinhua. In contrast, the Shanghai Stock Exchange has a market capitalization of $ 4.6 trillion, according to the World Federation of Exchanges.

The new stock market is aimed at domestic investors, with minimal opportunity for foreign participation right now. But as a profiled pilot program, developments are looking at how China's stock markets look in the future.

Foreign institutions must also assess the potential for China's financial market to develop into one driven by various factors than the United States, Reynolds pointed out. He noted that in the US many investment decisions are made at institutional level, such as the pension funds. But in China he said that individuals make many decisions.

"At the end of the day, you have a lot of money sitting in individual hands," Reynolds said.

Reynolds said the question he is considering is whether China's financial markets will transition to more institutional adjustment, or whether an individualized digital system will become more widespread.

"And it can be quite different market structure if I think of a securities firm (and) how I can play, or as an insurance company," he added.

At least, foreign investors will have to intervene with the very real difference between a centralized and a fully market-driven financial system.

When the shares declined last year, the Chinese government tried to convince funds to support companies with good development opportunities, but was under pressure from the shares they had promised as collateral.

"What we are heading for is a full confrontation," said James Early, managing director of investment research firm Stansberry China. "Can't have a free market and a completely controlled market at the same time. (We) are getting closer to learning about reality to a command economy."