China stocks surge on new board debut
By Olivia Chung
HONG KONG - The world's newest stock exchange opened with a
bang in China on Friday, with money flooding in to drive up the price of all 28
companies listed on the ChiNext board, based in the southern city of Shenzhen.
Trading in all the stocks was halted at least once during the morning after
they rose 20% from their opening price, triggering exchange circuit-breakers.
Among the biggest gainers was movie-maker Huayi Brothers Media Corp - a vehicle
for stars such as Jackie Chan and Jet Li. The company's shares climbed 148%
from their initial public
offering price to close at 70.8 yuan. Also in heavy demand was electrical
equipment-maker Zhongyuan Huadian, its shares closing up 76% per cent at 56.7 yuan.
The ChiNext market has less stringent listing requirements than the nation's
two main boards, including Shenzhen's board for small- and medium-sized
companies. That may attract smaller mainland companies that can't meet
requirements, such as three years of annual profit before listing. Such
regulations have previously been a factor in encouraging start-ups such as
Internet search firm Baidu to sell shares on the Nasdaq in the United States.
The
opening day surge in prices
also indicates the higher risk factor in trading in small companies. Huayi Brothers,
which was valued at about US$1.7 billion at the market close, trades
at about 124 times earnings - a level more associated with valuations of technology companies
before the hi-tech bubble burst early this decade. The price
to earnings ratio of the Shanghai Composite Index, which tracks shares in the country's larger
mainland-listed companies, is 33.
"High
returns and high risks" is the nature of the new market, said Zhang Hui, an
analyst at Bohai Securities. "Investors are only looking for quick profits by
investing on ChiNext."
Thomas Ng, investment strategist at Quam Securities Company, was optimistic at
the ChiNext's prospects, despite the risks involved, given the care with which
the China Securities Regulatory Commission (CSRC) prepared for its opening.
"After a decade of consideration, the CSRC has planned a stringent risk-control
mechanism, including circuit-breakers of 20% from their opening price exchange
to curb excessive speculation," Ng said. "The system at the same time means
supply is larger than demand, which will lead to a sharp rise in the listed
companies."
Zhou Xiaochuan, governor of the People's Bank of China, the central bank, said
at an opening ceremony that risk-control should be a priority in the ChiNext
market.
Rules governing trading include that any stock moving more than 80% either up
or down on its first day of trading will be suspended until three minutes
before the market's close.
Overseas investors interested in a punt on the new market can do so through
Qualified Foreign Institutional Investors, 87 of which have been approved by
the government.
China first made plans to launch a Nasdaq-style board for trading of start-up
shares in August 1999. The plan was postponed in 2001 when the Internet bubble
burst in the United States.
The global financial crisis and the closure of many old- and low-technology
companies as exports plummeted presented a renewed argument to open a market
such as ChiNext which would encourage venture capitalists to invest in
start-ups and have a realistic opportunity of winning back some of their
investments at an early stage.
Small companies in China have particular difficulty in attracting financial
support and loans from banks, which are more oriented towards lending to larger
state-owned or state-related firms.
One loser from the new market might be the equivalent small-business board in
Hong Kong, known as the GEM, according to Peter Lai, director at DBS Vicker
Securities,
"It is inevitable that in a short term the new market will attract potential
listing candidates as the investment sentiment is good whenever a new board is
established," he said.
Even so, there will be a positive impact on the mainland and the Hong Kong main
boards, he said.
"Investors who cannot buy shares in the new market will look at shares of
similar kinds in the Shenzhen and Shanghai stock exchanges. It will eventually
benefit Hong Kong-listed China equities, especially those trading at a deep
discount to [mainland listed] A-share counterparts," he said.
Olivia Chung is a senior Asia Times Online reporter.
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