Shanghai’s NASDAQ-style technology board “a wild gamble”

By Alex Hamilton | 6 February 2019

The Shanghai Stock Exchange’s new Technology Innovation Board is a “feeble” and “wild gamble” at creating entrepreneurial spirit, which will “crash and burn”, according to Stanley Chao, vice president of All In Consulting and author of Selling to China.

The China Securities Regulatory Commission (CSRC) unveiled its roadmap for the new board on the exchange in late January, stating that it would allow hitherto unprofitable technology firms to list. Chinese president Xi Jingping first announced plans for the board in November last year, in a speech at the first China International Import Expo.

Companies that report a profit of 50m yuan ($7.4m) on aggregate in the previous two years and have a capitalisation of more than 1bn yuan ($149m) will qualify to apply for an IPO on the new board. Unprofitable companies that have made a minimum of 300m yuan ($44.6m) in sales the previous year will also be eligible to list.

“It’s a feeble attempt to create a high-tech spirit or entrepreneurial spirit – something the Chinese already have. You don’t have to fuel the fire with this wild gamble,” says Chao. “China is already innovating. If you’re a young Chinese person who has an idea I think you will already find a way to start something on your own. There are enough private investors willing to invest in startups. You don’t have to go onto this new board and try to attract dumb money.”

Foreign-funded companies are also welcome on the board via a Chinese depository receipt (CDR). Under the CDR system, a custodian bank handles a slice of a firm’s shares, which it then sells on an exchange abroad.

The new board will allow shares to rise or fall by a maximum of 20% per day, compared to the 10% limit currently in place for shares listed in Shenzhen and Shanghai. The board will operate with a registration-based initial public offering (IPO) system, the first of its kind for a mainland Chinese exchange.

“I think the Chinese are confusing two issues and are muddling everything,” says Chao. “China has its ‘Made in China 2025’ strategy, where they want to develop homegrown technologies in specific areas, so that they don’t have to rely on Western technologies anymore.

“One way of attracting local homegrown technology companies is to open up your capital markets to younger firms that haven’t proven themselves and are perhaps three or four years from starting up. But by doing this on the new board they are ruining, not stabilizing, their capital markets.

“You have to shore up companies that are going public. They have to have a good balance sheet and a good track record. They have to have good third-party auditing. This new board is going to have none of that.”

Mainland investment

Chinese companies raised $64bn globally in 2018 via IPOs, according to Refinitiv data. $19.7bn of that came from listings in Shanghai and Shenzhen, compared with $35bn in Hong Kong. There were 33 IPOs listed by Chinese companies in the US, the highest since 2010. The Hong Kong Stock Exchange listed the highest number of Chinese IPOs, with 76.

“The Chinese were very disappointed when a lot of their high-tech firms went to the New York Stock Exchange or the NASDAQ. Even when things go to the Hong Kong Stock Exchange, a lot of Chinese still don’t think of Hong Kong as part of China. Money going into Hong Kong, to them, is still money coming out of China.”

The Technology Innovation Board will not be the first time China has attempted a listing channel to stimulate technology growth. In 2010, Shenzhen launched its ChiNext board with an initial 28 firms and a total market capitalisation of $1.6bn, which has since grown to more than $14bn. Yet Chao believes that the Technology Innovation Board will “crash and burn” rapidly.

“What they’re going to end up having is a lot of bad companies that don’t see themselves as capable of going to another board trying to make a quick buck: ‘let’s think short term, get on this new board, make a big fanfare, make some money and go bankrupt in a few years, who cares?’. The better companies aren’t going to go on this board because all they’re going to see is a bunch of failures. That’s what you’re going to end up with, just a bunch of losers on this new board. It’s not good for China.

According to Chao a simple solution, which would help grow both Chinese startups and the markets they operate in, would be to allow Western firms into China to invest. “China needs to allow for more investment by opening up to foreign companies and individuals, allowing them to come into the country and invest in these startups. [It needs to] give more freedom to these foreign investment companies like JP Morgan or Morgan Stanley to come in and be on the advisory boards of the these startups at early stages.”

“What people are telling me about this is that it was a spur of the moment thing that Xi Jingping and his people just came up with, without consulting professionals or the ministries or the Chinese actually involved in capital markets. They threw it down to those in charge and said, ‘hey, we want to do this, now develop some rules and make it happen.’ That’s no way to implement a robust, successful exchange, and I think China will learn from this the hard way.”

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