Fraser Howie is co-author of "Red Capitalism: The Fragile Financial Foundations of China's Extraordinary Rise."
On the anniversary of the opening of Shanghai's STAR market, do average returns of more than 200% for new listings signal success or failure? Over the past year, about 130 initial public offerings have raised over $25 billion, with a median of around $100 million per listing. That is pretty good by the numbers.
STAR's main purpose has been to try and develop China's IPO market by pushing more risk onto investors through a registration process completed through a regulator rather than a more formal approval process; through much lower financial listing requirements such as profitability or length of time in business; and through the removal of price-to-earnings ratio caps.
Beyond that, STAR allows for much greater stock volatility during the first week of listing, and ongoing daily price swings of up to 20% rather than the usual 10% on other boards.
The fact that ChiNext, Shenzhen Stock Exchange's tech board, is about to adopt the same listing and trading rules as STAR shows how influential the new market has become. The clearest sign of success after one year is the announced listing of Ant Group -- certainly the most important privately owned financial company in Asia -- on both STAR and the Hong Kong Exchange. Whether the returns and underlying company financials are solid, though, is far from clear.
China's leading exchange through the 1990s and 2000s, Shanghai was where all the big state-owned enterprises listed, as well as the major telecom, banking and insurance IPOs, often with dual listings in Hong Kong.
Then came the technology boom and the rise of Shenzhen. At the end of 2000, Shanghai had 559 listed companies compared to the Shenzhen Stock Exchange's 451. Now the more technology-focused Shenzhen exchange leads Shanghai with 2,246 listings to Shanghai's 1,650, and Shanghai's daily trading volume has not exceeded Shenzhen exchange for over two years.
Partly a way to diversify away from the limited number of quasi-monopoly listings of state-owned companies that had boosted Shanghai -- private business and startups are in theory limitless -- the STAR board was seen as something genuinely new for Shanghai and China as a whole when President Xi Jinping announced it in November 2018 as part of the country's continued opening to foreign capital. While Shenzhen had been listing smaller companies on its SME board since 2004, and for the past decade on its ChiNext board, Shanghai had nothing similar.
But do STAR's figures add up? A quick scan of key indicators such as price-to-book or price-to-earnings ratios can seem like something from a random number generator, with the spread running from minus 3,853 to plus 1,241 according to Wind Financial. A comparison with Chinese large caps has median price-to-book ratios and price-to-earnings ratios come in at 8.9 and 87 for STAR versus 2.4 and 26 for the CSI300 Index.
That partly demonstrates the low revenues and profitability of many of the companies' startup business models. One company touting itself as a provider of all things quantum jumped nearly 1,000% on its listing day. Last Thursday, homegrown chip manufacturer Semiconductor Manufacturing International Corp., or SMIC, listed at 27.46 yuan ($3.92) per share, only to see the shares jump to nearly 90 yuan on the same day. The same company already listed in Hong Kong trades at 31.9 Hong Kong dollars ($4.11).
Regardless of issuance levels and first-day stock limits, this looks all too similar to the China IPO patterns we have seen for decades, where trillions of yuan have chased new listings regardless of underlying corporate performance.
Driven primarily by market sentiment coupled with liquidity, with authorities again promoting another "healthy" bull market, the big numbers are unsurprising. The test over the coming years will be to see whether the exchange can actively delist nonperforming companies. There are some hopeful signs of a more active delisting program on the Shanghai and Shenzhen exchanges, but STAR should be a real test of commitment.
For all its wild numbers and desire to list only the best and most innovative Chinese tech companies, STAR is a clear statement of intent. When looked at in association with other moves currently underway, Chinese authorities seem committed to opening up markets in a way they never have before.
China's desire -- and growing need -- to attract more foreign stock and bondholders and provide better listing venues for new companies, as well as those no longer welcome in the U.S., has been clear for some time. High-profile frauds such as Kangmei Pharmaceuticals and Luckin Coffee are exactly the wrong kind of image that China wants to project when it comes to its companies and markets.
STAR's easy registration procedures and flexibility will help drive the range and quality of listings, but the huge price jumps and premium over Hong Kong reflect a real problem for domestic capital market development. In a closed system awash with money, where corporate and retail investors have an appetite for speculation, it becomes very difficult to properly value companies in the absence of other options.