LEX There’s volatile, and there’s ChiNext. All 28 debutantes on Shenzhen’s new board for growth stocks tripped their circuit-breakers on Friday, some more than doubling. On Monday, two-thirds of them did so in the other direction, tumbling more than 10 per cent. Beijing-based Huayi Brothers, China’s largest film studio, was typical – up 147 per cent, down 11 per cent. If the Shanghai Stock Exchange is a bit of a casino, then the new junior board looks like it will be a back-alley cockfight.
Growth markets often falter: remember Easdaq or Germany’s Neuer Markt? Successful venues can take years to develop a full spectrum of issuers, from main market proxies (low volatility, high volumes, analyst coverage) at one end, to striplings barely out of venture capital at the other. But the omens are not encouraging for China’s new bourse. Growth markets need patient, long-term investors. And ChiNext is as short of those as its seniors in Shanghai and Shenzhen. On CLSA estimates, about a fifth of the capitalisation of the mainland markets is publicly accounted for, held by local and foreign institutions. The remainder is owned by flighty retail investors and shadowy government-linked bodies, whose investment objectives are anyone’s guess. Growth markets also need unhysterical valuations. At the close, the average trailing price/earnings ratio of ChiNext constituents is 71 – more than double that of the Shanghai benchmark and more than triple the S&P 500’s.
The rationale for ChiNext remains sound. The world’s leading capital markets – London, New York, Tokyo – are multi-tiered. China’s start-ups have struggled for access to equity capital; the internet companies Baidu and Ctrip, for example, now worth a combined $17bn on Nasdaq, had to look elsewhere. A reliable outlet for growth stocks also draws in more private equity money to back listable candidates. But note the key word, “reliable”. ChiNext is anything but.
BACKGROUND NEWS | |
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The speculative nature of China’s equities markets was on full display on Monday as 20 of the 28 stocks on the newly launched ChiNext market fell by the 10 per cent daily limit on their second day of trading. On their debut last Friday, all 28 ChiNext stocks surged, gaining between 76 per cent and 210 per cent and pushing price to earnings ratios as high as 150. “The roller coaster ride in the first two days of trading tells you just how speculative the market is,” says Jerry Lou, chief China equity strategist at Morgan Stanley. “It looks like a pretty risky place to put your money, especially for retail investors.” |
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