New Chinese stock exchange opens with a surge

New Chinese stock exchange opens with a surge
China’s GEM has been likened to a “VIP table on top of a big casino”. — Reuters pic

SHANGHAI, Nov 2 — The highly anticipated opening of China’s new Nasdaq-style stock exchange last Friday is already being seen as a watershed moment for the country’s capital markets, providing new opportunities for Chinese investors and an alternative source of financing for upstart companies.

Investors went on a wild buying spree during the first day of trading Friday on the Growth Enterprise Market, or GEM, sending the shares of some companies soaring as much as 210 per cent.

“This is potentially a major game changer in China’s high-tech industry,” said Yu Zhou, a professor at Vassar College in Poughkeepsie, NY “For about 10 years, the biggest problem for China’s innovative companies was finance. You know it is very hard for them to get loans from state-owned banks.”

The buying was so feverish that regulators, trying to calm the market, temporarily suspended trading in the shares of all 28 newly listed companies at different points on Friday, and analysts warned about the risks posed by excessive speculation and inflated stock prices.

Stocks on the GEM opened sharply lower today, with many shares down 10 per cent.

Still, the first batch of companies listed on the GEM — including film producers, software makers and pharmaceutical companies — raised about US$2 billion (RM6.8 billion) in their initial public offerings, far more than the companies had hoped.

By the end of trading Friday, the combined market value of the newly listed companies was more than US$20 billion, creating fortunes for the founders and investors in those companies.

China is already the world’s biggest market for initial public offerings, and its resurgent economy is flush with capital and investors with a big appetite for risk.

But trading experts have long complained that this country’s market system is seriously flawed, partly because of a misallocation of capital.

State-run banks lend primarily to state-owned companies, which tend to be inefficient. Listings on the Shanghai and Shenzhen stock exchanges are dominated by government enterprises. Young private Chinese companies generally list their shares overseas, in Hong Kong or on the Nasdaq or New York Stock Exchange, because there are few opportunities for stock listings inside the country.

But the government hopes to change that with the creation of the GEM, which is based in the southern boomtown of Shenzhen. The government is seeking to create a more efficient capital market system, one that would steer investment capital to small and midsize private enterprises — companies that can help reshape the economy through technology and innovation, rather than low-price exports.

Although the GEM, which is also known here as ChiNext, is tiny when compared with the Shanghai and Hong Kong stock exchanges, regulators hope it will eventually compete with Nasdaq and entice more Chinese companies to list with GEM.

The GEM is also expected to give a boost to China’s venture capital and private equity markets, which have been hampered by a system that until now has not provided wealthy investors with what industry insiders call an exit strategy, or a way to eventually cash out of their investments in small companies through a domestic stock market.

There are big hurdles to creating a stock exchange similar to Nasdaq, which includes companies like Microsoft, Intel and Google. For instance, volatile stock prices and high valuations could hurt the new bourse’s credibility with entrepreneurs and investors.

Chinese investors are known to speculate, favouring momentum buying and selling rather than the underlying fundamentals of a company, analysts say. Indeed, the casino-like nature of the Shanghai and existing Shenzhen exchanges, combined with government intervention, have added to the volatility of the Chinese markets.

Analysts warn that the GEM could also be prone to similar speculative frenzies.

Andy Xie, an economist who formerly worked at Morgan Stanley, is already calling the GEM a “VIP table on top of a big casino.”

Chang Chun, an expert on financial markets at the China Europe International Business School in Shanghai, said that China needed a market to serve start-ups, but “the issue is the maturity of Chinese investors.”

Before trading opened Friday, he said, regulators created rules to guard against excessive volatility and even warned investors that they would crack down on aggressive speculation. Still, Friday’s opening — with 28 companies beginning to trade at once — was marked by wild price swings.

One cause of concern was the huge valuations of the first batch of stocks listed Friday.

The average GEM-listed company has a price-to-earnings ratio of about 100 — meaning investors are paying about US$100 for every US$1 of 2008 earnings. By comparison, the Standard & Poor’s 500-stock index of big American companies trades at closer to 20 times earnings.

GEM stocks are also priced far above Shanghai stocks, which have long been considered inflated by United States standards.

Still, hundreds of Chinese companies are eagerly awaiting their turn to list on the GEM, and many analysts say the exchange will fill an important need: directing financing toward smaller start-ups that help rebalance economic growth. Zhou at Vassar said she had heard that there were over 1,000 companies in Beijing’s high-tech district alone that met the requirements to list shares on the GEM exchange.

Analysts say many more start-ups will be eager to list after seeing the riches made by the first group of companies to go public on the GEM.

For instance, Wang Zhongjun and his brother Wang Zhonglei are the founders of Beijing-based Huayi Brothers Media, one of the country’s leading film producers. Shares in their company jumped 148 per cent Friday, for a valuation of about US$1.7 billion. — NYT