After a year of operation, China's Nasdaq-style sci-tech innovation board, also known as the STAR Market, has witnessed steady expansion with a number of achievements. The board, launched on the Shanghai Stock Exchange (SSE) on June 13, 2019, is aimed at boosting the capital market to better serve the real economy, and driving technological innovation. According to the SSE, over 100 companies have been listed on the board since it started trading on July 22 last year, whose total market value has exceeded 1.5 trillion yuan ($212 billion).

Proposed in 2018, the board is designed to provide direct financing support for companies in hi-tech and strategic emerging sectors such as next-generation information technology (IT), advanced equipment, new materials, new energy, energy saving and environmental protection. It has piloted the registration-based initial public offering (IPO) system since its launch, easing the listing criteria for innovation-oriented enterprises while adopting higher requirements for information disclosure.

By May 27, the SSE had handled listing applications from 304 enterprises, of which 110 firms are still under review. Over 50 percent of the enterprises are in the IT and biomedicine industries and their average investment in technological research and development (R&D) occupies around 10 percent of their total revenue.

Tech enterprises listed on the board have reported growth in revenues, and have improved their innovation ability and information disclosure. It has supported firms which can take a long time to become profitable by easing access to financing and domestic capital market, Liu Chao, a deputy professor with Hebei Finance University, wrote in an article published by Science and Technology Daily.

However, delegates at the Two Sessions, the annual meetings of the national legislature and the advisory body held in late May, pointed out that many problems in the operation of the board remain to be addressed, such as drawn-out IPO review, weak administrative punishment and redundant de-listing systems.

To bring the role of the board into fuller play, efforts will be made to enhance the merger, reorganization and re-financing systems, develop policies on information disclosure and improve equity incentives to help tech companies attract more talents, a statement released by the SSE on May 29 said.

Innovation trials

Before the introduction of the sci-tech innovation board, some of the innovation-driven enterprises in China had gone to the stock exchanges in Hong Kong and the United States to be listed. To boost such enterprises, which have increasingly become major driving forces of China's economic growth, and allow domestic investors to share the benefits from their growth, the STAR market is developed for the companies to raise funds in the mainland capital market.

A total of 25 companies were listed on the board when it started trading on July 22, 2019, with an average share price surge of about 140 percent. Some enterprises even saw the share price increase by more than 400 percent on that day.

Over the past year, the board has made gradual progress in piloting new practices to support qualified enterprises while keeping unprepared ones out. According to the SSE, the board had raised 118.8 billion yuan ($16.6 billion) for the listed enterprises totaling 100 as of April 29 this year. The turnover of the enterprises exceeded 147 billion yuan ($20.7 billion) in 2019, up 14 percent year on year. Despite the impact of the novel coronavirus epidemic, enterprises on the board saw their total net profit reach nearly 3 billion yuan ($424 million) in the first quarter of this year, a year-on-year increase of 12 percent.

According to annual reports of the enterprises listed on the board on April 29, rising spending on R&D has driven technological innovation of the firms, which created over 2,500 new patents in 2019.

The board has tightened reviews of enterprises to be listed. Eversec Technology Co. Ltd. was denied IPO by the China Securities Regulatory Commission (CSRC) in August last year, marking the first STAR market IPO denial. According to the CSRC, it found that the company had weaknesses in its accounting work.

However, it has created inclusive rules to embrace eligible tech firms in different growth phases and with different equity structures, as a registration-based system with five sets of standards for listings is developed for unprofitable firms and red chip enterprises. The latter are enterprises registered overseas, listed in Hong Kong but mainly operating in the Chinese mainland.

In January, Shanghai-based UCloud Technology Co. Ltd. went public on the board as the first company with a dual-class share structure on the A-share market. Suzhou Zelgen Biopharmaceuticals Co. Ltd. was also listed on the board in the same period, marking the beginning of the listing of loss-making enterprises on the A-share market.

"The inclusive standards have allowed some enterprises with great potential to be listed on the STAR market and grow rapidly," Dong Dengxin, Director of the Finance and Securities Institute, Wuhan University of Science and Technology, told Beijing Review.

The launch of the sci-tech innovation board also provides reference for ChiNext, China's another NASDAQ-style board for hi-tech companies in the Shenzhen Stock Exchange, on implementing the registration-based IPO system, Liu said. To boost the domestic capital market, the government introduced the new Securities Law in March to expand the registration-based IPO system, which ensures streamlining the approval procedures for companies to float shares in mainland stock markets, stricter requirements on information disclosure, and tougher penalties for illegal market practices. Later in April, it decided to pilot the system at ChiNext to replace the approval-based one to boost startups.

The sci-tech innovation board has seen rising foreign participation as China continues to improve its A-share market and global index provider MSCI further increases index weighting for China A-shares. Equities on the STAR Market have become eligible for inclusion in the Morgan Stanley Capital International (MSCI) Global Investable Market Indexes (GIMI) since November last year.

An Shumei, an employee of the British multinational investment bank HSBC Securities (USA), told China Securities Journal, the MSCI's A-share inclusion and the launch of the sci-tech innovation board have attracted more foreign investors to the Chinese capital market through the Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors programs.

Further foreign participation in the STAR Market would require expansion of the sci-tech innovation board and smooth entry of eligible participants to facilitate the trading of big institutional investors, Dong said.

Ongoing reforms

Besides the board's problems in IPO approval, information disclosure and the delisting system were discussed during the Two Sessions. The SSE pledged that it will strengthen the information disclosure system to ease access of listing, enhance supervision and enforce administrative punishment for illegal practices more strictly to protect the interests of investors. It has highlighted the introduction of the T+0 system for investors to sell the stocks they buy on the same trading day to ensure the liquidity in the market, and adjusted the SSE Composite Index system.

A circular released by the SSE on June 5 said that it will introduce more supporting policies to attract high-quality red chip enterprises to list on the sci-tech innovation board.

The measures can attract listed enterprises of diverse industries to the A-share market, Dong said, adding that the sci-tech innovation board needs to be expanded to allow access to large-scale institutions and more capital.

According to Liu, the STAR Market also needs to explore a different role from ChiNext and drive the capital market through competition with the latter.

As Xie Dong, Director of the Shanghai Municipal Financial Regulatory Bureau, told Shanghai Observer, the sci-tech innovation board can play a greater role in boosting new infrastructure by backing Internet-based and intelligent enterprises. It needs to improve its global competitiveness and introduce a SSE STAR Market 50 component index.

According to the SSE, the index will reflect the overall price performance of listed companies on the new board as well as the market structure and changes, and enrich the SSE index system. As Gui Haoming, chief market analyst from Shenyin & Wanguo Securities Research Institute, told Securities Daily, the absence of the index has made analyses of the trend of the board difficult. Since the board has made considerable progress over the past months on reducing speculation-oriented investment and diversifying different products, it is a good time to introduce the index.

As Xie highlighted, the sci-tech innovation board needs to get ready to cope with the rising uncertainties in the global capital market caused by the pandemic and oil crises. Only 26 domestic companies completed overseas IPOs in the first four months of this year, compared with 117 in 2019 and 110 in 2018.

It also needs to prepare for the return of qualified Chinese firms trading abroad that are seeking to be listed in Hong Kong and the Chinese mainland, she said.

(Print Edition Title: A Year of Trials)

Copyedited by Madhusudan Chaubey

Comments to lixiaoyang@bjreview.com