What is China's STAR Market?

The Shanghai Stock Exchange has created a hot new market showcasing some of China's most promising tech companies, all with the goal of catching up to America's Nasdaq, the birthplace of many of the world's legendary and pathbreaking tech giants. The Shanghai Stock Exchange Science and Technology Innovation Board is being called the STAR Market for short by Chinese authorities, and began trading on Monday with 25 listed companies. These stocks ended the opening day with sizzling gains ranging from 84% to 400%, The Wall Street Journal reports.

“It’s a bit crazy, but I think the situation will calm down a bit in the next few days,” Jack Zhang, an analyst at BOC International, a securities brokerage and investment banking subsidiary of the Bank of China, told the Journal. He believes that individual investors with an appetite for risky speculation drove most of the first-day action.

“Gains were much stronger than expected, either due to unreasonable IPO pricing or speculative trading,” Zhu Junchun, a Shanghai-based analyst with Lianxun Securities Co., told Bloomberg. “It’s going to be a liquidity game in the first half year or one year of trading. Judging by the trading activity and gains on the board, it’s definitely a success,” he added.

Challenging Nasdaq

China's vision is to make the STAR Market a serious competitor to the Nasdaq, and that IPOs from innovative Chinese startups will be listed there rather than on exchanges in the U.S. or Hong Kong. The concept of the STAR Market has a big advocate in Chinese President Xi Jinping, whose goal is to spur a new burst of economic growth in his country and to make China a global technology leader, going far beyond its current role as a low-cost manufacturing and assembly venue for foreign tech firms.

STAR comes as China and the U.S. are locked in a protracted trade war that's hurt the sales and profits of large tech companies from both nations, with no quick resolution in sight.

Flood of Applications to List

Since March, 149 Chinese firms have applied for listing on the STAR Market, with 28 of these having received approvals so far, and 25 having actually launched their IPOs, per the Journal. These 25 have raised a combined 37 billion yuan ($5.4 billion), and their average trailing P/E ratio is a hefty 53.4 times earnings, the report adds. The amount raised exceeded expectations by about 20%, Bloomberg notes.

STAR Market also will accept companies that are already listed in Hong Kong, per the Journal. Only certain qualified foreign investors can purchase shares listed on the STAR Market directly, Bloomberg indicates.

Relaxed Regulations

The eye-popping opening day returns are partly the result of a regulatory exemption for the STAR Market, suspending a rule that otherwise limits first-day gains to 44% on the Shanghai and Shenzhen exchanges, per the Journal. After the first five trading days, however, daily price moves will be capped at 20% either up or down, Bloomberg indicates.

Circuit breakers in place for the first five days halt trading for ten minutes if a stock moves more than 30% above or below its open, then again if the change reaches 60%. These limits are wider than those otherwise enforced by Chinese exchanges, Bloomberg says.

The STAR Market accepts listings from unprofitable companies and from companies with unequal voting rights, both of which otherwise would be barred from going public on other Chinese exchanges. Making it easier for young Chinese tech firms to raise capital for growth is apparently a key goal for STAR Market, which is China's third try at challenging Nasdaq, the Journal notes. The previous two, ChiNext in Shenzhen and the "new third board" in Beijing, have seen declining trading and market values in recent years.

Stratospheric Initial Gains

The biggest opening day gainer, up 400%, was Anji Microelectronics Technology (Shanghai) Co., a maker of semiconductor products, per the Journal. Its meteoric rise triggered two trading halts during the opening morning. In second place, with a 267% gain, was advanced materials maker Western Superconducting Technologies Co., with software firm Harbin Xinguang Optic-Electronics Technology Co. posting the smallest gain, despite rocketing up by 84%.

The average gain for the 25 companies was 140%, though most closed down from their intraday highs, Bloomberg reports. Their combined trading volume was 48.5 billion yuan ($7.1 billion), or about 13% of the total for the entire Shanghai Exchange.