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Stocks

Shanghai stocks hit 7-year high as China backs startups

HONG KONG -- The Shanghai Stock Exchange Composite Index peaked at 5,051 during morning trading Friday, breaking 5,000 for the first time since Jan. 21, 2008.

     ChiNext, a Nasdaq-style index for the Shenzhen Stock Exchange, rose 2.4% at one point Friday morning, which helped propel the Shanghai index upward.

     The Shanghai index nearly crossed 5,000 on May 28 but took a sharp step back. It had been hovering below that level before the Chinese government stepped in with a new policy Thursday that is expected to make it easier for Chinese startups listed overseas to return to home exchanges.

     The government decided in a State Council meeting to encourage startups with "special equity structures" to list in domestic stock exchanges. The government also approved tax incentives for small and midsized businesses, leading observers to say China aims to lift emerging domestic industries.

     Red chip companies, those based in mainland China but incorporated overseas, are one type of company designated as having a special equity structure, Chinese financial newspaper Securities Times said. These include many Hong Kong-listed, state-owned enterprises such as China Mobile and consumer goods outfit Chinese Resources Enterprise, companies not typically regarded as startups.

     Another type of company with this designation are variable interest entities. A VIE is a company that is split into two entities, one that operates in China and the other that is listed in overseas stock exchanges. And VIEs like e-commerce giant Alibaba or search engine company Baidu aren't rushing to list on a mainland Chinese index due to all the red tape and time involved, an analyst said.

     But other VIEs like Internet companies that can't list on a U.S. exchange for various reasons such as having too small a market capitalization are increasingly turning to the mainland stock markets. With the Chinese market's recent rally, some stocks appear to enjoy better results than if they were in the U.S. market.

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