Shanghai inaugurates a new technology platform at Nasdaq

China is again trying to strengthen the credibility of its volatile stock market.

On Monday, China launched a new Nasdaq-style scorecard – the Science and Technology Innovation Council, or "STAR Market" – in which 25 companies were listed, to address investor concerns, such as market volatility and lack of governance.

China is the second largest stock market in the world, just behind the United States. More foreign capital is expected to flock to mainland China's shares with their inclusion in major investment indices.

But the retailers' participation was relatively high, which led to a lot of speculative activity that led many people to call the Chinese stock market a casino.

Governance is also lacking. In recent months, some large publicly traded companies have reported criminal executives being detained, or the disappearance of billions of inexplicable dollars.

Beijing also wants its best companies to be listed at home. The country has produced some of the world's largest technology companies, but they chose to be listed abroad. This is partly due to the stringent requirements of home profitability and brand credibility offered by markets such as New York or Hong Kong.

China's securities regulator, Yi Huiman, presented the new equity council as a pilot program to test new practices before implementing it elsewhere.

The focus is on value industries with high growth potential, such as the manufacture of high-tech equipment and biotechnology. The council also creates a national investment channel for companies operating in national security zones that can not receive foreign capital.

Some of the key features of the board are:

• Allow certain companies of a certain size to be listed before making a profit
• Make it easier for a company to go public by relying on a registration rather than waiting for the approval of its regulator – 57 companies have become public in the A-share market. Shanghai last year, compared with 143 on the main board of Hong Kong, according to PwC.
• Require individual investors to have badets of at least 500,000 yuan ($ 72,655) and two years of securities trading experience.

All this looks promising, except that it is the third time in 10 years that China has established a new major stock market. The last time dates back to 2013, when the new third OTC board was put into operation. In 2009, ChiNext was launched in Shenzhen. Neither has been able to earn the same investor interest as the primary A share market.

Anecdotally, many Chinese venture capitalists and other primary market investors are hoping for a new platform that would allow them to exit investments more easily and with high valuation. The UBS Securities China Equity Strategy team said in a note that the average implied ratio of the price / earnings ratio for the first group of companies was 53, compared with 49 for the ChiNext index.

But many investment funds prefer to wait to see if the new board will meet expectations before making comments or participating.

The board of directors of Sci-Tech Innovation is above all a public supporter of Chinese President Xi Jinping, who announced his plans for the board of directors last November. Regulators and market participants took just over six months to put everything in place for Monday's registration. The question is how much of this momentum will continue.

"China is centralized, different from the United States and Europe." Given the evolution of Chinese financial markets, the situation is very different, "said Andy Nybo, director of Burton-Taylor International Consulting, which conducts research on the financial markets. "Regulators, political forces, will try to influence and support (the board of directors) to make this initiative a success."

The new stock market is part of Beijing's overall effort to strengthen its domestic financial system, which has much less weight on the international scene than the entire economy. The Chinese stock market, in its modern version, has existed for less than three decades, while the history of the New York Stock Exchange dates back more than 200 years.

"(In China), we will likely move from a fund-based financing world to a little more finance-based financing," said Peter Reynolds, a partner at the management consulting firm Oliver Wyman. . "This trip requires some underlying infrastructure, and parts of this infrastructure can be developed now and are being tested."

As experience, the Sci-Tech Innovation Board is relatively small in terms of relative capital. According to the Xinhua News Agency report, the 25 companies are expected to raise 37 billion yuan in the run-up to Monday. In contrast, the Shanghai Stock Exchange has a market valuation of $ 4.6 billion, according to the World Federation of Exchange.

The new stock market is aimed at domestic investors, with a minimal possibility of foreign participation at the moment. But as a leading pilot program, its development deserves attention for the future of China's stock markets.

Foreign institutions must also take into account the development potential of the Chinese financial market based on factors different from those of the United States, said Reynolds. He noted that in the United States, many investment decisions are made at the institutional level, such as pension funds. But in China, he said, people make a lot of decisions.

"At the end of the day, you have a lot of money left over in individual hands," Reynolds said.

Reynolds said the question was whether Chinese financial markets would evolve towards more institutional matches or whether an individualized digital system would be more widespread.

"And it can be a very different market structure if I think of a stockbroker (and) how I could play, or even an insurance company," he added.

At the very least, foreign investors will have to face the real difference between a centralized financial system and a fully market-oriented financial system.

When stocks dipped last year, the Chinese government tried to convince the funds to help companies with good prospects for development, but was under pressure from the shares it pledged.

"We are heading towards a total confrontation," said James Early, CEO of investment research firm Stansberry China. "We can not have a free market and a fully controlled market at the same time, we are getting closer to the reality of a managed economy."