What’s different about this market?
Regular A-share IPOs in Shanghai and Shenzhen are approval-based. All new offerings are priced at a maximum of 23 times earnings, are heavily oversubscribed, and most allocations go to retail investors. An initial IPO “pop” is taken for granted among mainland investors: shares commonly rise by the daily trading limit for days or weeks after they begin trading.
By contrast, Star Market IPOs are registration-based. Deals go through a more conventional book-building process to arrive at a market-based valuation. The majority of IPO allocations will go to institutional investors, and there are no hard limits on trading in the first five days - although circuit breakers can lead to a temporary pause in trading. Multi-tiered share structures (such as those favoured by tech companies listing in the US) are permitted, and companies won’t be subject to the usual 3-year profitability requirement. Retail investors need to have a minimum level of trading experience and at least 500,000 renminbi (about $72,600) in their broking account.
These are all fairly radical changes for China’s capital markets. So too is the speed with which the Star Market was set up - it was only announced last November, by President Xi Jinping during a visit to Shanghai. Other similar innovations, such as the newly launched Shanghai-London Stock Connect, were several years in the making.
For China, the Star Market aims to keep innovative companies at home, but also to help institutionalise and professionalise the country’s homegrown equity markets by reducing short-term speculation. Market-driven reforms mechanisms included in the new board’s IPO and trading regime are key to this push, but success will require changing mindsets too.