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China tech

China's new tech-focused exchange falls short of promises

Shares of all 25 companies rise but government influence overshadows talk of reform

SHANGHAI -- China's new Science and Technology Innovation Board got off to a strong start in its first day of trading on Monday, with all 25 companies seeing their share prices rise.

But while the debut performance was all the government could have hoped for, the makeup of the new board raises questions over its ability to attract tech startups and serve as test bed for market reforms.

The market remained somewhat overheated throughout the day, with Anji Microelectronics Technology Shanghai climbing 400% from its IPO price.

Beijing has stressed that it has adopted trading rules in line with global standards for the new board, including easing a 44% cap on first-day price gains that applies to China's existing stock market. The government has also repeatedly emphasized the need to provide investment for startups in such fields as semiconductors and electric vehicle batteries.

The overriding influence of the government and the Communist Party on this new and ostensibly more market-driven board, however, remains clear.

Of the 25 companies that debuted on Monday, several receive the bulk of their orders from the state, including China Railway Signal & Communication Corp. The state-owned maker of railway operation systems, which is also listed on the Hong Kong Exchanges and Clearing. Beijing Tianyi Shangjia New Material, a manufacturer of railway brake components, delivers products to state-owned train manufacturers.

Train manufacturer CRRC, meanwhile, is looking to cement its position as the global leader by raising capital from the new stock market. Its "Fuxing Hao" bullet trains, the most advanced in China, are named after a slogan the president himself has advocated: the "great rejuvenation (fuxing) of the Chinese nation."

Military-related companies are well-represented on the board, too. These include Beijing PIESAT Information Technology, a satellite surveying company that is involved in BeiDou, the Chinese version of GPS, and Ricom, which reportedly makes lenses for military applications. Joining them is Harbin Xinguang Optic-Electronics Technology, which makes engineering systems for missiles.

The constituents of the new board also highlight the government's determination to create domestic ecosystems for semiconductors, automotive batteries and other niche technologies. Advanced Micro-Fabrication Equipment (AMEC) manufactures chipmaking equipment, while Ronbay Technology makes positive-electrode material for lithium-ion batteries, and Guangdong Fine Yuan Science Technology produces copper foil for lithium batteries.

At least 13 of the 25 companies, moreover, receive government financial support, either directly or indirectly.

Espressif Systems Shanghai, which develops telecommunication chips, and Fangbang Electronics, an electromagnetic shield company, both have the China Integrated Circuit Industry Investment Fund as a shareholder.

The fund was set up in September 2014 and its operations have been closely in line with "Made in China 2025," a blueprint for upgrading China's industries announced by Xi in 2015.

"The Xi leadership has been rushing to produce flagship technologies domestically in the wake of U.S. sanctions on ZTE in 2018," said Zhou Yu, a director at the Shanghai Academy of Social Sciences.

Though the new stock market had long been in the works, tensions with the U.S. apparently provided the impetus for it to finally become a reality.

In November 2018, Xi delivered a speech at the China International Import Expo in which he issued a strong warning against the protectionist trade policy being pursued by the U.S. administration of President Donald Trump.

Almost immediately, progress began to be made on the new board.

The average price-earnings ratios of the 25 companies was above 50 when calculated based on public offering prices.

While this makes them overvalued compared with issues on the first section of the Tokyo Stock Exchange, which average about 14, one local securities company official said this is not a problem. "It is probably advantageous for the government to recoup investment funds."

Others in the private sector echoed that view.

And government advantage is clearly Xi's main concern. The president once said, "Party, government, military, civilian, and academic; east, west, south, north, and center, the Party leads everything."

The party and the government, in this view, take clear precedence over private-sector investors, both institutional and individual.

With the effects of the stock bubble burst of 2015 still lingering, it is likely that China is also hoping that the Science and Technology Innovation Board will kick-start renewed interest in Chinese stocks.

China has created new markets to shore up stock prices in the past, such as the Growth Enterprise Market, which opened in Shenzhen in 2009.

But many of the companies on the new board with close links to the government and military make only a small percentages of their sales to the private sector, while others, including semiconductor-related companies, are seen as lacking international competitiveness.

Strong post-listing business performances and continued information disclosure will be key for these companies to attract sustained investors interest.

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