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China's STAR Market to ease merger rules for tech companies

Smoother delistings seen as way to attract domestic players facing US pressure

Visitors attend the SEMICON China 2020 semiconductor expo in Shanghai on June 28.

SHANGHAI -- China's answer to Nasdaq looks to loosen merger and acquisition rules, aiming to attract more stock market listings as the U.S. intensifies scrutiny on Chinese companies.

Hu Rixin, deputy director of the Shanghai Stock Exchange's Offering and Listing Center, said Sunday that the bourse is drafting rules to let the market play a bigger role, as current regulations hamper delisting.

"It will be more flexible," Hu said at an investment forum on the sidelines of SEMICON China 2020 in Shanghai, the country's biggest semiconductor exhibition.

The bourse in July celebrates the one-year anniversary of its Science and Technology Innovation Board, which has drawn 100 initial public offerings with a market capitalization of 118.8 billion yuan ($16.8 billion) through April.

The board, known as the STAR Market, was announced by Chinese President Xi Jinping in November 2018 amid the trade war. It was created to offer Chinese tech companies an alternative to listing in the U.S., where the Nasdaq opens the door to global startups with low regulatory hurdles.

Players applaud the STAR Market's similar flexibility. This includes letting unprofitable startups with proprietary technologies float their shares and a registration-based rule that gives the board a bigger say over listing approvals, bypassing stock market regulators.

This flexibility has allowed Chinese startups to list locally and encouraged listing by "red chips," or Chinese companies that are registered offshore.

But rules covering delisting remain rigid, and market players like Hua Capital Management cite as a downside the high price-to-earnings ratio of some semiconductor companies -- reaching 80, or more than half the average.

"It is an issue, as valuation will come down after the lockdown period," Chen Datong, chairman of Hua Capital's investment committee, said at the same forum. "As a result, investors will postpone acquisition targets to two or three years later."

Hua Capital invests in STAR Market-listed companies including Amlogic and Tztek.

Such concern reflects the growing opportunities for technology sector acquisitions in the domestic market as the U.S. tightens scrutiny on Chinese companies, including in the areas of listing rules and the purchase of technology.

"The pressure by the Department of Commerce is a new normal," said Liang Sheng, an official at the Beijing Economic-Technological Development Area. He was referring to the U.S. department's Entity List, which bars some Chinese enterprises from doing business with American companies.

As foreign governments including Japan encourage companies to shift production away from China, Liang urged forum participants -- including investors in the semiconductor field -- to adjust and seek opportunities in the domestic market.

Despite such setbacks, some analysts think Chinese companies will embrace globalization in the long run.

"No matter the external environment, the Chinese semiconductor industry should further integrate itself into the global semiconductor ecosystem, rather than building a unique, standalone supply chain," Christopher Thomas, a visiting professor at Tsinghua University in Beijing, told the Nikkei Asian Review.

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