A Star is Born

Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.

A Star is Born

China has long been regarded as a cheap producer of low value-added consumer goods. But this has changed. Chinese companies like Tencent (social networking giant), Alibaba (world’s largest retailer and Xiaomi (the Apple of China) have grown massively, shifting perceptions.

Many economists now believe the US is lagging China in key areas like artificial intelligence (AI) semi-conductors, AI robotics and electric vehicle battery technology. Because of this significant shift the US has come to regard China as a major league technology competitor; adding fuel to already simmering trade tensions.

Last year Chinese President Xi Jinping, announced plans to push China into becoming the world’s largest player on the technology front. The decision to create a separate stock index on the Shanghai Stock Exchange (SSE), named the Star Market, forms part of that plan.

The new stock market, which is now in operation, has been set up along the lines of the National Association of Securities Dealers Automated Quotations, the NASDAQ exchange in the US. The role played by Nasdaq in the US has been pivotal to the US cleverly spawning many successful innovative companies; some of which have transformed into world beating companies. There are currently over 3000 stocks listed on NASDAQ, including instantly recognisable companies like Facebook, Apple Amazon, Netflix and Alphabet (Google)- the so called FAANG’s.

NASDAQ, when compared against the main stock exchange indices globally, has powered ahead: These other indices do not have such a pure and heavy exposure to technology.

Cumulative Returns of Global Developed Market Equity Indices v NASDAQ

Source: Bloomberg, data as of July 2019.

Political spats associated with China’s success in the technology space became elevated when the US Justice Department accused the Chinese company Huawei of theft of intellectual property. This makes the task of achieving a competitive advantage even more important. China wants a cache of growth enterprises to emerge and evolve through time and is intent on moving fast.

This bring us neatly to the Star Market. Although small, with 25 companies listed last month, the first day of trading was phenomenally successful. The companies listed posted an average gain of 140% and created 3 new management billionaires (in dollars) – Chen Wenyuan (Suzhou HYC Technology), Cao Ji ( Zhejiang Hangke Technology) and Hui Deng (Arcsoft)

The Star Market is certainly something to watch. Broadly speaking it has a number of aims;

  1. To prevent Chinese technology companies from having to list abroad; important when punitive US tariffs are in the pipeline and the US could shut down foreign listings on their exchanges.
  2. Broaden out the number of Chinese technology companies; 140 companies have signed up for listing on the exchange, building on the 25 stocks physically traded on day 1.
  3. Allow unprofitable companies to list; important because many tech and biotech start-ups depend upon access to finance for expansion and to realise profit potential over a longer time scale.
  4. Allow professional and retail investors in the market to decide the true worth of companies without the state intervening.

The Star Market provides a way of increasing accessibility for investors to deploy capital in new ideas and enterprises. It reduces state intervention and encourages entrepreneurs. In time, the Star Market will be a serious rival to NASDAQ. Investors with capital will always seek the best returns and this new star has potential to shine brightly.

Rivalry between the US and China for technological leadership will persist. This will have a positive aspect with more capital attracted to new opportunities. Increased determination will create technological advances not yet on anyone’s radar so it is game on, and we will be sure to keep you posted with any new developments.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.

Global Markets