The Shenzhen Stock Exchange (SZSE) has officially started an overhaul to fast track initial public offerings (IPOs) on its board – ChiNext. Under the pilot registration-based system, amongst other changes, IPO candidates no longer need approval from the China Securities Regulatory Commission (CSRC). This will greatly shorten the waiting period for listings from months or years to within 20 business days.
In addition, shares traded on ChiNext, except in the first five trading days following their IPOs, are now allowed to rise or fall by 20% on a single trading day. This range is double the previous daily price limit of 10%.
“By simplifying the IPO application process, the latest set of reforms aim to increase liquidity in the market, thereby helping channel much-needed capital into new economy sectors amidst an economic downturn.”
The Shenzhen ChiNext bourse debuted in October 2009 with 28 stocks and offered an alternative listing venue for new economy companies with lower requirements for earnings and market capitalisation than the main board. Today, there are 814 stocks listed on the ChiNext with a total market capitalisation of RMB 5.5 trillion and a daily trading volume of 9.35 billion. The bourse is smaller compared to the main board – the Shenzhen Stock Exchange, on which 2,271 stocks are trading with a total market cap of RMB 27.23 trillion and an average daily trading volume of 31.87 billion1.
By simplifying the IPO application process, the latest set of reforms aim to increase liquidity in the market, thereby helping channel much-needed capital into new economy sectors amidst an economic downturn. The wider trading range can also make it costlier to manipulate stock prices, potentially creating a more standardised and transparent trading system.
Historically, the shares on the ChiNext board are more volatile than the overall China A-share markets, although not as volatile as in Shanghai’s Nasdaq-style Science Technology & Innovation (STAR) Market. See Fig. 1.
Fig 1: Volatility of shares trading in China A markets
China first introduced the registration-based IPO system in the STAR Market, launched in July 2019. In April 2020, the CSRC announced that it would replicate the Shanghai board’s registration system on the ChiNext board. While the changes to the daily price limit and registration-based IPO system bring the ChiNext board more in line with the STAR Market, there are still differences between the two bourses.
“Investors looking to invest in stocks on the ChiNext board should exercise prudence, stay focused on fundamentals and avoid being led by emotions.”
For one, the Shanghai STAR Market is aimed at attracting and financing ‘hard’ technology companies in high-end equipment, biotechnology & health care, information technology, new materials, renewable energy, energy saving and environmental protection sectors.
The ChiNext, on the other hand, does not explicitly specify sector preferences like the STAR Market. It provides listing channels for companies new with both traditional or new business models, with a focus on the new economy sectors. Another key difference is that while the STAR Market allows unprofitable companies to issue and list, the companies listed on the ChiNext are profitable; with pre-profit companies allowed to apply for listing only after the first year following the reforms.
These differences are in turn reflected in investor threshold levels. The STAR requires investors to have an asset threshold of RMB 500,000, while the asset threshold for new investors for ChiNext is set at RMB 100,000.
We believe that, in the short term, the wider trading range for ChiNext is likely to increase the market’s volatility. Over the longer term, however, as further reforms in the capital markets are introduced, volatility should decline with the increased participation of institutional investors. Nevertheless, investors looking to invest in stocks on the ChiNext board should exercise prudence, stay focused on fundamentals and avoid being led by emotions.
Overall, we are agnostic about where a stock is listed. Rather, we prefer to assess the attractiveness of a stock against its growth prospects as well as the outlook for the sector, while bearing in mind the potential risks it may bring to the overall portfolio.
- This document is produced by Eastspring Investments (Singapore) Limited and issued in:
- Singapore and Australia (for wholesale clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore, is exempt from the requirement to hold an Australian financial services licence and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Australian laws.
- Hong Kong by Eastspring Investments (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong.
- Indonesia by PT Eastspring Investments Indonesia, an investment manager that is licensed, registered and supervised by the Indonesia Financial Services Authority (OJK).
- Malaysia by Eastspring Investments Berhad (531241-U).
- This document is produced by Eastspring Investments (Singapore) Limited and issued in Thailand by TMB Asset Management Co., Ltd. Investment contains certain risks; investors are advised to carefully study the related information before investing. The past performance of any the fund is not indicative of future performance.
- United States of America (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is registered with the U.S Securities and Exchange Commission as a registered investment adviser.
- European Economic Area (for professional clients only) and Switzerland (for qualified investors only) by Eastspring Investments (Luxembourg) S.A., 26, Boulevard Royal, 2449 Luxembourg, Grand-Duchy of Luxembourg, registered with the Registre de Commerce et des Sociétés (Luxembourg), Register No B 173737.
- United Kingdom (for professional clients only) by Eastspring Investments (Luxembourg) S.A. - UK Branch, 10 Lower Thames Street, London EC3R 6AF.
- Chile (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Chilean laws.
- The afore-mentioned entities are hereinafter collectively referred to as Eastspring Investments.
- The views and opinions contained herein are those of the author on this page, and may not necessarily represent views expressed or reflected in other Eastspring Investments’ communications. This document is solely for information purposes and does not have any regard to the specific investment objective, financial situation and/or particular needs of any specific persons who may receive this document. This document is not intended as an offer, a solicitation of offer or a recommendation, to deal in shares of securities or any financial instruments. It may not be published, circulated, reproduced or distributed without the prior written consent of Eastspring Investments. Reliance upon information in this posting is at the sole discretion of the reader. Please consult your own professional adviser before investing.
- Investment involves risk. Past performance and the predictions, projections, or forecasts on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of Eastspring Investments or any of the funds managed by Eastspring Investments.
- Information herein is believed to be reliable at time of publication. Data from third party sources may have been used in the preparation of this material and Eastspring Investments has not independently verified, validated or audited such data. Where lawfully permitted, Eastspring Investments does not warrant its completeness or accuracy and is not responsible for error of facts or opinion nor shall be liable for damages arising out of any person’s reliance upon this information. Any opinion or estimate contained in this document may subject to change without notice.
- Eastspring Investments (excluding JV companies) companies are ultimately wholly-owned/indirect subsidiaries/associate of Prudential plc of the United Kingdom. Eastspring Investments companies (including JV’s) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America or with the Prudential Assurance Company, a subsidiary of M&G plc (a company incorporated in the United Kingdom).