At two years old, Shanghai's Star board is already bigger than Spain's capital market and shields investors from global tech rout

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The Star Market, China’s Nasdaq-style board, which is celebrating its second anniversary, has emerged as a safe haven for investors seeking shelter from Beijing’s crackdown on technology companies.

The board, also known as the Science and Technology Innovation Board, on the Shanghai Stock Exchange has become a major listing venue for China’s smaller hi-tech companies looking to raise funds on their home turf. And as it entered its third year of operations on Thursday, it is being boosted by Beijing’s unending scrutiny of the country’s biggest technology companies, which has prompted investors to seek alternatives to stocks listed in Hong Kong on Star Market.

“Star Market is a test case for the reform of China’s capital markets,” said Wang Yang, analyst at Zheshang Securities in Shanghai. Most companies on the board were in sectors such as semiconductors, 5G and biopharmaceuticals, which are characterised by fast earnings growth, he added.

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The board is the result of a direct push by Chinese President Xi Jinping, who mooted the idea at China’s first world import expo in 2018. Since trading commenced on July 22, 2019, listings on Star Market have ballooned to 311 from an initial 25, and their combined market value has grown to US$716 billion. If the board were to be treated as a stand-alone market, it would be ranked 20th in the world, ahead of Spain’s capital market, which is capitalised at US$704.7 billion.

China’s simmering tensions with the US and its latest edicts seeking to protect domestic users’ data have lifted the importance of Star Market, as the country needs a more efficient and well-functioning market to financially underpin technology firms and fend off the threat of an American technology blackout.

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Moreover, the close scrutiny of Didi Global also signals top policymakers’ intentions of tightening their grip on overseas listings, potentially including those in Hong Kong, a move that could benefit Star Market.

Buoyed by an influx of funds switching out of companies such as Tencent Holdings and Meituan trading in Hong Kong, the Star Market 50 index of the 50 most valuable companies on the board has risen to a one-year high this month. It has also gained 28 per cent since a low in March this year. Companies listed on the board have so far avoided the regulatory storm that is rattling the technology industry, as their business operations – spanning from chip making to high-end manufacturing and biotechnology – fall in areas supported by government policy.

Star Market companies’ first-half net income probably jumped 109 per cent from a year earlier, almost double the growth rate of the small caps listed in Shenzhen, according to an estimate by Shenwan Hongyuan Group.

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“Against the backdrop of the protracted trade war between [China and the US], the bull run on Star Market has just started,” said Zhang Yidong, an analyst at Industrial Securities. “China will be competing with the US in the fields of technology, advanced manufacturing and domestic consumption in the future.”

The absence of mega listings has, however, tempered expectations that Star Market will become a hub for China’s unicorns. Ant Group’s US$34.5 billion dual initial public offering (IPO) was scuttled by regulators at the eleventh hour in November.

Its biggest IPO so far is chip maker Semiconductor Manufacturing International Corporation’s (SMIC) listing, which raised US$7.5 billion last year. It is also the most valuable company on Star Market with a market cap of 416 billion yuan (US$64.3 billion). But SMIC is about a tenth of the size of Tencent, the biggest Chinese technology firm trading in Hong Kong.

The record held by SMIC will probably be broken soon. Syngenta Group, the Swiss seed and fertiliser business owned by China National Chemical Corporation, is planning a US$10 billion IPO on Star Market, according to a prospect published this month. The company, which underwent business revamps after being acquired in 2017 in China’s biggest overseas takeover, is seeking to sell no more than 2.79 billion shares, although no date has been given for the stock sale. The listing will be the largest globally this year.

Policymakers are also taking action to instil more confidence in the board. In a blueprint released by Beijing last week to further strengthen Shanghai’s competitiveness, Star Market aims to introduce a marketmaker system, a move that analysts said would help boost its liquidity and tame price swings.

The new trading system will boost the liquidity and stability of Star Market, said Wu Kaida, an analyst at Topsperity Securities. “And it will lower investment risks arising from new business models and swings in earnings,” he added.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

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