October 10, 2019 / 6:18 AM / 12 days ago

Breakingviews - Stars gradually align for new Shanghai tech bourse

A sign for STAR Market, China's new Nasdaq-style tech board, is seen before the listing ceremony of the first batch of companies at Shanghai Stock Exchange (SSE) in Shanghai, China July 22, 2019. REUTERS/Stringer ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. CHINA OUT.

HONG KONG (Reuters Breakingviews) - China’s new technology bourse just got some fresh sparkle. MSCI on Wednesday said stocks on Shanghai’s recently launched STAR Market could be eligible for index inclusion. That should revive trading volumes, and more good news is coming.

After a euphoric start in July, the much-hyped STAR Market has lost some gloss of late. The pace of new listings slowed, with just eight additions as of Oct. 10 to the initial batch of 25. The average trading volume over the past week is down by roughly a third from the month-long average, data from Refinitiv show. Investors that bought in on the bourse’s first day have still nearly doubled their money. But shares in the maiden listing cohort have fallen by around 40% from an August peak on a market cap-weighted basis, according to calculations from Brian Freitas, who publishes on SmartKarma. The wider Shanghai Composite Index has rallied slightly over the same period – although it too has seen a sharp drop-off in volume.

The MSCI endorsement, which might pull in passive foreign funds, will revive investor interest. Moreover, China’s stock market operator is gearing up to launch an index tracking STAR companies later this month. The board is off-limits to small traders, but the latest initiative would support the development of exchange-traded tracking funds, providing more liquidity and allowing ordinary investors to get exposure.

Capital-hungry startups look excited too. So far, companies have raised a total of $7 billion on the new market, according to Dealogic. Even as exchange officials slow processing of new listings to tame volatility, the pipeline of STAR applicants has reached 161, the latest exchange figures show.

The government is now planning to roll out some of the STAR Market’s experimental reforms elsewhere. Specifically in Shenzhen, the tech-heavy ChiNext growth board might trial a similar registration-based IPO system where companies, not regulators, decide pricing and valuations. That would be a major step toward finally overhauling the country’s dysfunctional equity markets.  

The STAR Market still has a long way to go. Shares trade at over 70 times earnings on average. Even so, this bold equity experiment is headed in the right direction.     

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