China's Nasdaq Opens with a Bang

18 September 2019
Shanghai'a new STAR market creates an express track to market for China's 94 unicorn start-ups. It looks like a wild ride.

Ever hear of Anji Microelectronics ? You may wish you had. The Shanghai-based semiconductor maker was the star performer on opening day of the STAR market, China’s would-be answer to Nasdaq, July 22.


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Shares in Anji (ticker: 688019.China) jumped fivefold from their initial-public-offering price, then sold off only 10% over the next few days. The slowpoke of the 25 new listings, Harbin Xinguang Optic-Electronics Technology (658011.China) rose a mere 84% out of the gate.

If the STAR market—proper name, Science and Technology Innovation Board—sounds like a casino, it is, sort of. It also could be a very big deal financially and geopolitically.

Markets-wise, China is home to 94 of the world’s 326 unicorns, or private companies valued at more than $1 billion, according to the World Economic Forum. Many have been stalled at the gates of going public by a creaky and capricious approval process that the STAR market is meant to streamline. Meanwhile, China’s listed stocks are dominated by slow-growth state-owned banks and oil companies. “One of the key problems in China is that capital allocation has been horrible,” says Tiffany Hsiao, lead manager of the Matthews China Small Companies fund.

That’s not the only reason that Beijing authorities, whose default mode in the financial sphere is glacial caution, rushed the STAR market into existence eight months after President Xi Jinping announced the project. U.S. threats to companies like Huawei Technologies and Xiaomi (1810.Hong Kong) have underscored China’s dependence on U.S.-made semiconductors and software for its advanced industry.

Unleashing domestic producers like Anji to raise investor cash may offer the quickest way to armor that Achilles’ heel. A spate of new issuers in health care and biotech could also decrease an aging China’s dependence on Western drug companies. “Most of the companies coming to market will be very aligned with the China 2025 plan,” says Drew Bernstein, managing partner at Marcum Bernstein & Pinchuk, an audit firm that consults frequently in China. He refers to a state strategy to insure Chinese global tech leadership six years hence.

Read more: Fewer Chinese Companies Are Going Public in the U.S. What to Expect Next.

All that spells opportunity to Hsiao. “We’ve been following a lot of these companies for years and waiting,” she says. “We’re very excited.” The explosive price run-ups could be justified by extraordinary underlying growth. The 25 Star market companies have grown revenue an average of 50% annually over the past three years, compared with about 10% for the Nasdaq, Matthews calculates.

Other investors are waiting for the dust to settle. “We are not involved in the STAR board because it does not trade on fundamentals and is very expensive,” says Jennifer Lai, co-manager of Greater China strategy at Dalton Investments.

Beijing’s last attempt at a homegrown Nasdaq, the ChiNext market, launched in 2009, languished for lack of liquidity, notes Gaurav Mallik, chief portfolio strategist at State Street Global Advisors. But China didn’t have 94 unicorns to invest in then. Global managers have become more comfortable with Shanghai-listed stocks, so-called A shares, in recent years, upping their presence on that market to more than 5%. And they’ve been rewarded lately despite the political backdrop. The XTrackers Harvest CSI 300 China A-Shares exchange-traded fund (ASHR) is up 28% this year.

All good auguries for the STAR market, Mallik says. Eventually. “I could tell you 10 reasons why this exchange won’t work, but I’m an optimist because the Chinese authorities know they need the foreign participation,” he says. “Some of it just takes time.”