STAR Market offers opportunities for investment into China’s tech industries

When China’s Science and Technology Innovation Board – or STAR Market – debuted on July 22, shares soared as much as 520 percent in a frenzied day of trading. By market close, stocks had gained 140 percent on average, more than doubling the board’s combined market capitalisation. (see Fig 1).

Chinese chipmakers and tech-focused healthcare firms made up some of the 25 companies that began trading on day one, though more than 140 firms signed up to list on the Nasdaq-style equities market.

STAR Market, which is operated by the Shanghai Stock Exchange (SSE), was launched in the hope it would boost investment in a new generation of home-grown tech start-ups, and even lure back Chinese success stories like Alibaba and Tencent that chose to list their shares abroad. “Establishing the STAR Market is a major step to implement the strategy of invigorating China through science and technology,” Lynda Zhou, Portfolio Manager at Fidelity International, told World Finance. Despite its initial success, some doubt the exchange’s ability to transform China’s capital markets.

The STAR market is less stringent about profitability: for the first time ever in China, certain companies can now go public before they are lucrative

Sparking interest
STAR Market is part of China’s strategy to further develop its hi-tech industries. However, the broader plan to boost the technology sector, Made in China 2025, has taken a back seat amid the ongoing trade war with the US.

Hostility between the US and China has escalated over the past year, and some policies – such as higher tariffs – have directly impacted China’s tech sector. The Trump administration even blacklisted Huawei, a Chinese maker of smartphones and 5G network supplies, over national security concerns. Through the introduction of the STAR Market, Chinese officials hope to develop their own capital markets in order to become less reliant on debt and foreign money. “At [the] macroeconomic level, it will help the country to sustain economic growth by funding technological innovation rather than through massive infrastructure spending,” Zhou explained.

Compared with other exchanges in China, STAR Market’s lenient listing requirements are designed to be more attractive to start-ups. For example, STAR is less stringent about profitability: for the first time ever in China, certain companies can now go public before they are lucrative. This was a logical move, according to Ufuk Güçbilmez, a senior lecturer in finance at the University of Bath, because the practice is “completely acceptable” in more developed markets like the US. “You want to go public at the point when you are still growing. When you are still growing, you tend to be unprofitable,” Güçbilmez told World Finance. “Now I think China understands that.”

STAR Market also conforms more closely to US markets by allowing unequal voting rights. In the US, dual-class share structures allow the founders of companies such as Facebook and Alphabet’s Google to retain control of their businesses even with a small portion of shares when those shares have higher voting rights. Although these structures receive some criticism, Güçbilmez said it is a good strategy for STAR Market, which is looking to lure in more innovative tech firms. “It’s all about making the STAR Market more attractive for
entrepreneurs,” he said.

In light of these changes, Zhou called STAR Market a “milestone” in the ongoing transformation of China’s capital markets and its shift towards an economy focused
on hi-tech industries.

Losing lustre
While the changes made by STAR Market are significant, this is not the first time China has launched a new exchange aimed at attracting top technology firms.

While it remains to be seen whether any of China’s major success stories will return to their home market, Zhou believes there is a possibility that those that haven’t gone public yet, such as Ant Financial, would consider STAR Market. Still, she is cautious about the short term, as swings in valuation create volatility. Looking at the bigger picture, however, Zhou is optimistic: “In the long run, I keep my positive view [of] the STAR Market.” In time, Zhou sees STAR emerging as a “vibrant market” for China.

To make that prediction a reality, China must continue to address the concerns that cause foreign investors to avoid the market and cause China’s best and brightest companies to favour foreign listings. If these issues are addressed comprehensively, it is possible STAR could be a beacon of light for China’s hi-tech economy.