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OPINION

A Star is born

A Star is born
July 25, 2019
A Star is born

SSE officials are determined to provide a viable listing alternative to Hong Kong and New York, thus providing capital to fund the nation’s evolving tech sectors – worth an estimated $256bn, according to Forrester Research. Lossmaking companies have been given the green light to apply for a listing, and companies will also be able to issue dual-class share structures, which enable the founders of fast-growing tech businesses to retain control. 

To ensure that standard market forces play a central role in determining prices, there were no daily price limits imposed on the Star Market during the first five days of trading, although regulators will attempt to keep a lid on excessive speculation by imposing a 20 per cent upside/downside limit following the initial period. Additionally, if a company's stock oscillates by more than 30 per cent in either direction, a 10-minute trading suspension will be imposed.

Although restrictions are in place, this represents a soft-touch approach, almost laissez faire by China’s standards. Laudable in a sense, but there is more to developing an efficient market than incremental liberalisation. Certainly, one of the most compelling reasons for investing in Nasdaq is that stocks usually have upwards of a dozen market makers, thereby providing adequate liquidity and enhanced price discovery, both highly desirable attributes when you’re investing in volatile sub-sectors. 

The market certainly got off to a flyer. Initial trading proved suitably hectic, with strengthening volumes and a minimum gain of 84 per cent recorded across the constituents. The aggregate market cap increased by 135 per cent over day one, but duly rolled back on day two as investors took profits from opening day gains. That was to be expected and it will take a while longer before the Shanghai alternative approaches Nasdaq’s total value of $12.3 trillion, but SSE tub-thumpers would argue that it's another pointer to the liberalisation and maturation of the country’s domestic financial sector – we're not so sure.

Whether the likely proliferation of unicorns (a start-up company with a value of $1bn or more) represents progress is open to question, particularly given the way that large institutional investors and private equity have been piling into the tech space. The trouble is that if asset prices become detached from their underlying intrinsic value, prudence tends to give way to speculation. That’s fine if you’re a private equity firm looking for a profitable exit point, but these conditions don’t usually work out so well for retail investors. And anyone considering a foray into this corner of the market should think twice given that analysis from the SSE indicates that margin loans were a major catalyst for the initial surge on day one.

The Star Market kicked off a month after the launch of London-Shanghai Stock Connect, a pioneering scheme that lets UK and Chinese companies sell shares on each others’ stock markets. It's clear that China is determined to develop its internal capital markets, but it's debatable whether the artificial constraints (daily trading limits) placed on stocks to reduce volatility are compatible with an efficient secondary market.