China has created a tech-focused stock exchange. The Shanghai Stock Exchange’s Science and Technology Innovation board, popularly called STAR, launched this week with 25 companies. The companies surged on average of 140% with one (Anji Microelectronics Technology) hitting 400%. Through STAR, China has created a small equivalent of NASDAQ, a U.S.-based stock exchange that is largely dominated by technology companies. Possibly, through this experiment, China can keep its leading tech companies like Alibaba (which trades in U.S.) to list at home.
Beijing hopes STAR, which has strong backing from Chinese president Xi Jinping, will emulate—and eventually compete with—the Nasdaq in fostering innovative startups. It has long been a source of irritation to China’s leaders that the nation’s hottest tech companies—including Alibaba Group, Tencent, Baidu, and smartphone maker Xiaomi—have opted to float shares in the United States or Hong Kong and largely ignored exchanges in Shanghai and Shenzhen.
One reason for STAR’s giddy opening: regulators exempted it from a rule that limits first-day gains on exchanges in Shenzhen and Shanghai to no more than 44%, although after the first five days of trading, daily price changes will be limited to no more than 20% up or down. STAR’s intraday circuit-breakers are wider, as well. Even so, several companies triggered them within minutes of Monday’s opening.
Yet, the most important thing about STAR is not creating an equivalent for local companies but making it easier for these companies to trade. So, China which would not have typically allowed unprofitable companies like Lyft and Uber to trade would accommodate them via STAR; the Shenzhen and Shanghai exchanges admit only profitable entities. Of course, in this age where market share is strategic, many digital companies sacrifice profitability for growth. When they assume that pole position under the winner-takes-all network effect, they can then map the profitability roadmap.
Other STAR market rules are meant to make it easier for tech companies to raise capital for growth and investment. Unlike exchanges in Shenzhen and Shanghai, STAR doesn’t bar unprofitable companies, nor does it require companies to receive government approval to be listed. Moreover, the new market imposes no limit on the ratio of a share price to a company’s earnings at the time of listing. For some STAR companies, price-to-earnings ratios exceed 150.
The Nigerian Stock Exchange needs something that will be designed for promising technology companies in Nigeria. We want to see the likes of Paystack, Kobo360, Flutterwave and others list, at least their Nigerian entities, in Nigeria, within a new bourse that will accommodate their peculiarities. Simply, NSE needs Nigeria’s equivalent of STAR.
Click to join Tekedia Capital and build Next Africa with min of $10,000 co-investment in startups.