The article below is from our BRIEFINGS newsletter of 16 September 2019
China’s capital markets reform spread to new fronts this summer with the launch of the Science Technology Innovation Board. The Nasdaq-like stock exchange for emerging companies—dubbed the “STAR” market—has seen its shares rise over 140% since the first IPOs in July. Below, Goldman Sachs Research’s Kinger Lau discusses what distinguishes this market and its applicants, as well as what to expect in the way of foreign access.
Kinger, start us off with the big picture: Why did China develop the STAR market?
Kinger Lau: We think the new exchange was designed to help meet a few overarching policy objectives. One is to broaden the capital-raising channels available to private companies, specifically those in high-tech or high-value industries that can help China with its ongoing shift to a quality-focused growth model. Think of companies in innovative areas like artificial intelligence, big data, advanced semiconductors—these are the types of firms we expect STAR to give priority to when reviewing IPO applications, and we’ve seen early evidence of this with the first few listings. Beyond broadening market composition, we think another goal of the STAR board is to test out a host of capital market reforms. This is a market that can act as a sort of “proving ground” for potential liberalization measures before China considers rolling them out in its more established markets.
Tell us more about the reforms under consideration.
KL: Several relate to market access. Unlike China’s other mainland exchanges, which require companies to pass a lengthy approval process before listing, the STAR board is allowing companies to float their shares as long as they satisfy the basic listing requirements. And these requirements are less restrictive than what we see elsewhere in China: for instance, there’s no revenue or earnings prerequisite, which could help emerging companies like those we discussed earlier make a faster leap to market. And once they’ve reached the listing stage, companies on the STAR market also will be part of a pilot for market-based pricing and trading activity. Prior to STAR, all domestic IPOs in China effectively listed at or below a valuation cap of 23x price-to-earnings, and they also faced limits on price appreciation in their first few days of trading. The STAR board eliminates these caps in favor of a more market-driven approach.
Many of China’s past capital market reforms have focused on opening markets to foreign capital. Is this another step in that direction?
KL: Not directly—though with STAR applicants’ strong growth profiles and asset-light operating models, it’s not difficult to imagine STAR companies attracting international interest. For now, this market will be available to foreign investors only through the Qualified Foreign Institutional Investors quota system or through proxies. Here, we think ChiNext stocks and mid-caps are probably the closest fundamental comparables to the potential STAR listings from the perspectives of their underlying business profile, size, growth and valuations. So we could see a re-rating and sentiment shift in that direction.