From a distance, Shanghai's STAR Market for technology stocks, whose creation was announced a year ago by Chinese President Xi Jinping, shines brightly.
Prices for the 25 stocks that the market launched with in July are up 77% on average. And the number of stocks listed on what is formally the Science and Technology Innovation Board has more than doubled.
Included in the newcomers' ranks are the first domestic initial public offering sponsored by a foreign investment bank and the first domestically listed company with some shares that carry extra voting rights. The dual-class share structure is popular with technology entrepreneurs as a way to reinforce their management control.
Moreover, Chinese regulators pleased with the results of one of STAR's innovations -- the removal of a requirement that companies coming to IPO have a track record of profitability -- are carrying that change over to the Shenzhen Stock Exchange's ChiNext board.
But STAR isn't so shiny up close. The net gains for its launch group of stocks were all achieved during just the first day of trading. As a group, they continued to rise for another two weeks but then flatlined.
As measured against their first-day closing price, the original stocks were down nearly 20% as of Nov. 21. And that listing that UBS sponsored, of Shanghai Haohai Biological Technology? The stock had a great first day but soon became the first STAR issue to fall below its IPO price though it has since bounced back over its starting price. Overall, STAR trading volumes have also plunged since the market's heady early weeks.
Moreover, while 31 additional companies have listed on STAR since its launch, 42 have chosen to list on other domestic exchanges while, as of Oct. 31, 52 companies that had been cleared to list on STAR had yet to go ahead. Behind them were 84 companies that had applied to list on STAR but which were still waiting for clearance by the exchange or regulators.
That might sound a lot, but is not much compared to the waiting line at other Chinese exchanges or the stampede to STAR that some had expected. Plus ChiNext's move to copy STAR's waiver of the profitability requirement will mean that the Shanghai board has less to offer as a new alternative.
Indeed, STAR has started to look a lot like older Chinese markets, with IPOs priced below what demand would suggest. So much so that new listings soar on the first day of trading but then generally stagnate. The average price/earnings ratio of STAR stocks remains over 75, signally that the shares are overvalued.
STAR still faces competition from outside the mainland for China tech IPOs. Delivery services company Meituan Dianping and phone maker Xiaomi last year both ultimately chose Hong Kong over Shanghai. Because of their dual-class share structures, they were initially excluded from the Stock Connect programs that allow mainland investors to buy Hong Kong shares.
Both though were abruptly added last month. So while Xiaomi originally intended to get a dual listing in Shanghai, it now has little reason to proceed with that idea. STAR officials also could be concerned by reports that ByteDance, the Chinese developer of the hit short-video app TikTok, will list in Hong Kong next year, though it has denied such intentions.
Tech listings can be notoriously difficult to get right. One needs only to look to the U.S. examples like WeWork and Uber to see the pitfalls. So China is not alone.
For China to build a stock market that thrives on more than capital stuck within its borders, it not only needs to get the best companies to list onshore, it also needs to open the market to foreigners to allow them to access those companies. China seems unable to make up its mind to fully embrace this route even after 30 years of IPOs. China has announced bold moves to open the market further but they are still not fully implemented. Caution remains the watch word, with investors waiting for access to onshore financing and all futures contracts among other things.
The STAR market is a testing ground for all of China's domestic exchanges. The new flexibility shown in its trading and listing rules were needed but this was a top-down directive from the highest echelon of power. At the rate it is going, STAR could end up being the equivalent of the Xiongan New Area, a Xi initiative to build a new urban center south of Beijing that would rival Shenzhen and Shanghai. Xiongan has vanished from the headlines and remains irrelevant to the Chinese economy.
Touting the big gains of STAR stocks in their first 100 days is easy. The hard work of building a better market remains. It needs to attract more and better companies, but as the Chinese economy slows, are they really out there to be found?
Fraser Howie is co-author of "Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise." He has worked in China's capital markets since 1992.