China's wannabe Nasdaq works better on paper
John Foley
China’s new growth-stock market has made
quite an entrance. Shares of the 28 companies on Chinext, Shenzhen’s
answer to the US Nasdaq, all at least doubled during their first
half-day of trading. They were already priced at 40 times this year’s
forecast earnings on average, compared to the 30 multiple at which
Shenzhen’s main index trades. Chinese investors have got what they
needed least: a chaotic hive of overvaluation.
In theory, a
growth market makes sense for China. Savings could find their way to
technology and services firms, which often miss out on government
largesse and bank lending. That neglect belies their importance
promoting innovation and driving consumption. Companies, most of them
high-tech, instead tap overseas markets – which does nothing to help
China allocate capital efficiently.
But in practice, Chinext
looks like too much, too soon. China’s main markets are already more
volatile and risky than their foreign counterparts. Growth-stock
entrepreneurs are untested when it comes to public-market corporate
governance, to say nothing of the smaller underwriting firms that back
some stock issues. Chinext runs the risk of going the way of Germany’s
Neuer Markt, which was plagued by scandal before it eventually closed.
Germany
– like Hong Kong, Canada, the UK and Japan, which all established
separate growth markets – at least had something China doesn’t: a deep,
developed capital market. In China, even shares of large companies are
in short supply because small free-floats are the norm. Initial public
offerings typically attract double-digit oversubscription rates, such
is the scarcity of new investment opportunities. Some Chinext stocks
were oversubscribed more than 100 times, say people familiar with the
situation.
Meanwhile, Chinese investors are struggling to
access more of what they really need – bigger companies with proven
track records. The main markets are restricted by a regulator that
hand-picks listings based on policy objectives. Removing the red tape
for more mature companies ready and willing to float, and speeding the
release of state-owned untraded shares into the market, would genuinely
advance Chinese capital markets. Instead, the cartoonish outperformance
of Chinext is more likely to set them back.
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