With contributions from Eliza Gkritsi.
China announced Monday a reform that brings the Nasdaq-style registration-based listing process used by Shanghai’s STAR Market bourse to Shenzhen’s Chinext startup board.
Why it matters: China is stepping up efforts to mobilize private capital to assist companies hit by the coronavirus outbreak and accelerating financial market reforms amid increasing scrutiny of Chinese firms in overseas stock markets.
- Investors, however, expressed mixed reactions to the change. The Chinext Index dipped 2.7% on Monday morning and subsequently bounced back to gain 1% by the end of morning trading.
- The drop signals investor concern that existing Chinext-listed companies may lose a premium they have been enjoying as a result of the stricter initial public offering (IPO) system used before, James Hull, professional investor and co-host of the China Tech Investor podcast, told TechNode.
- “Making it easier to list would reduce this premium,” he said.
- Chinese investment companies saw their share prices rise on Monday with Kunwu Jiuding Investment Holdings, a Shanghai-listed private equity firm, gaining nearly 19% on Monday morning.
- The reforms are good for investment firms that back unprofitable tech companies because they can exit earlier, said Hull.
Details: The new IPO system allows companies that have yet to turn a profit to list on the Chinext startup board on the Shenzhen Stock Exchange, according to a draft rule (in Chinese) by the bourse on Monday.
- Companies seeking an IPO on Chinext will no longer need the go-ahead from the China Securities Regulatory Commission (CSRC), according to the draft. Instead, the Shenzhen bourse will review company filings and decide whether they are qualified to list.
- Chinext will allow companies to go public if they satisfy one of the three sets of financial indicators, including one that specifies revenues and estimated market capitalization—meaning unprofitable companies are no longer excluded.
- Stocks will trade without caps on the first five days of trading and will be capped at 20% gains or losses on subsequent days.
Context: China opened the STAR Market on the Shanghai Stock Exchange for trading in July, making it the first registration-based board in the country. A total of 99 companies were trading on the STAR market as of Tuesday.
- Established in 2009, Chinext was set up to serve China’s high-growth startups featuring relatively low requirements compared with the main boards in Shanghai and Shenzhen. Previously, it required applicants to have generated combined profits of more than RMB 10 million for two consecutive years.
- The CSRC had previously said it would reform major stock exchanges in the image of the STAR Market. The regulator said (in Chinese) on Monday that the Chinext reform had “drawn lessons from the STAR Market.”
- A total of 829 companies are listing on Chinext as of Tuesday and 183 companies are in the pipeline, according to the board’s website (in Chinese).