Trading activities on China’s new Nasdaq-style board for the homegrown tech firms exploded on July 22. Shares rose by as much as 400% for the day which extensively exceeded the veteran investors’ expectations. They seemed not ready for the wild ride but they welcomed it nonetheless.
16 of the first group of 25 companies more than doubled their IPO prices on the STAR Market. The chip-makers and health care firms participating in this initiative are operated by the Shanghai Stock Exchange through the STAR Market. In the volatile first day of trading, companies gained up to 140% averagely. That activity tripped the exchange’s elements that are designed to calm frenzied activity.
The day’s weakest performer gained 84.22%. The vice president of Shanghai See Truth Investment Management, Stephen Huang, said:
“The price gains are crazier than we expected. These are good companies, but valuations are too high. Buying them now makes no sense.”
STAR may be China’s strongest attempt at capital market modifications yet since it resembles Nasdaq with a fully functional US-style IPO system. It is also a step made by Beijing with an ambition to become technologically self-reliant. The move is greatly influenced by the persistent trade war with the US that is victimizing Chinese tech firms in the cross-fire.
The Price Movements
Trading in Anji Microelectronics Technology (Shanghai) (688019.SS) was stopped twice. The halts were made after the semiconductor firm’s shares hit two circuit breakers. The first stop came after rising 30% while the second followed once the shares climbed 60% from the market open. These regulatory mechanisms did little to keep Anji shares down as they exploded by 520% compared to their IPO price in the morning hours alone.
In the end, Anji shares concluded the day up 400.2% from their IPO price. That was the biggest gain for the day that gave the company a valuation of almost 242 times compared to the 2018 earnings.
Strangely enough, Suzhou Harmontronics Automation Technology Co Ltd (688022.SS), triggered circuit breakers to the downside. It plunged by 30% from the open market in the early hours of Monday before rebounding. This company’s shares closed the day’s trading at 94.61% higher than the IPO price. It was expected that the share prices would swing widely probably due to loose trading rules.
Reports revealed that IPOs among retail investors had been oversubscribed by around 1,700 times on average. During the first five days of any company’s trading, the STAR Market does not limit its share prices. That is in stark contrast with a cap of 44% on debut on the other trading boards in China.
In the following trading sessions, stocks on the new tech board will be authorized to rise and fall a maximum of just 20% in a day. That is double the 10% daily limit that is set on the other boards. Regulators took time to warn individual investors discouraging them from ‘blindly’ acquiring STAR Market stocks. However, they acknowledged that big fluctuations were normal.
Less stringent trading rules target to give market players enough freedom in the game. That will accelerate the formation of equilibrium prices while boosting price-setting efficiency as explained in a Shanghai Stock Exchange (SSE) statement on July 19. According to the SSE, it is normal for big swings to arise in newly listed tech shares since such companies are difficult to evaluate and have unclear prospects.
The exchange reported huge fluctuations in IPOs shares in the Hong Kong stock exchange and Nasdaq. It particularly singled out recently listed Chinese start-up Luckin Coffee (LK.O) and electric car firm Nio Inc (NIO). SSE announced that an index that will track the STAR Market will launch on the 11th trading day. That will happen after the debut of the 30th company on the trading board.
Main Board Haul
According to the chief analyst with Lianxun Securities, Zhu Junchun, extensive investor focus on the STAR Market may weigh on the main board. It will affect attention and liquidity in the short term. That effect was clear on Monday as the benchmark Shanghai Composite Index .SSEC fell 1.27% while the blue-chip CSI300 index .CSI300 ended the day 0.69% lower.
The dual-listed China Railway Signal & Communications Corp Ltd evidently showed the gap in investor enthusiasm. Its STAR Market shares doubled from their IPO price. The surge was not hindered by the company’s Hong Kong shares dropping by over 11% after worse-than-expected preliminary results.
Analysts, commentators, and experts like Huang at Shanghai See Truth encourage rationality. Any rational investor should wait on the sidelines and follow the proceedings keenly for up to a month before making any buying decisions. Some investors are happy with the debut of the trading board. They believe that it will propel investments in the sector and help China’s innovation projects to compete worldwide.
The vice general manager of Tongheng Investment, Yang Tingwu, believes that around 80% of the listed companies are ‘cannon fodder.’ However, the remaining 20% may produce China’s next Tencent or Huawei. Thus, they will make the market turmoil worth it.
According to him, the STAR Market has opened a new chapter for the greater China stock market. The Chinese dream in the capital markets is gradually becoming a reality.