After regulators raised the bar on initial public offerings to select domestic champions who can assist Beijing in its drive for technological self-sufficiency, a record number of companies dropped their plans to list at Shanghai’s technology-focused stock exchange.
In 2023, 126 companies cancelled or suspended IPOs on Shanghai’s Star Market. This is more than the four previous years combined.
According to bankers and documents, the city’s stock market, following guidance from regulators headed by the China Securities Regulatory Commission (CSRC), has raised standards for listing requests this year. This is a radical reversal in China’s approach to encouraging innovative ideas.
Before getting the green light for an IPO, companies must not only show a profit, but also demonstrate in hundreds of pages that their technology is at least on par, if they are not better, than industry leaders, and that their business model is viable.
Star Market was initially created to provide access to capital markets for high-risk companies.
Analysts said that while the authorities expected the increased regulatory scrutiny to channel resources towards what they deemed to be the most qualified companies in the end, the effort could undermine innovation by denying funding to high-potential startups.
Andrew Collier said that the Chinese government was saying, “I will not put my country’s muscles behind any company if it doesn’t guarantee success”. Collier is the managing director of Orient Capital Partners based in Hong Kong. “It’s a way too political policy to succeed.” “Asking an 8-year-old to select the best technology for moon landing, is the same as asking regulators to decide which high-tech firms should go public,” said Chen Zhiwu a finance professor from the University of Hong Kong. “It won’t succeed.”
In a September announcement, the China Securities Regulatory Commission stated that it would help qualified companies with “crucial technologies and core technologies” grow stronger by listing on Star Market. The China Securities Regulatory Commission said that “there is no such thing as listing requirements being tightened” at the time.
Star Market, which was established in 2019, did not require companies to have revenues or profits. They only needed a market valuation of Rmb4bn (US$550mn), and products that had “significant market potential” and “technological strength”.
Public records indicate that only one company, with no profit or less than Rmb10mn of revenue, has been listed on the stock exchange this year. This is down from eight companies in 2022.
The market no longer exists for start-ups that are losing money, even though the market was designed for them,” James Li said. He is a Shenzhen investment banker and has worked with IPOs at the technology board.
In a July regulatory inquiry, the Shanghai Stock Exchange questioned Yeestor Microelectronics (a Shenzhen based manufacturer of Flash Memory Control Chips that filed for a Star IPO in last year) if a decline in its global share indicated the company was lagging its peers in terms of new product launches and technology upgrades.
Officials at Yeestor said that the regulator was not convinced of our position as the market leader and only wanted the best companies to be listed.
Public records reveal that almost two thirds of IPO applications failed to gain approval in the nine-month period of this year. This compares with less than a fourth in 2022.
The regulatory environment is not friendly to us, said a TransGen Biotech official in Beijing. This month, the company retracted its Star Market listing plan after receiving over 100 regulatory inquiries. These included questions about why sales were so low despite the fact that the company had been in business for a long period of time.
The cancellations of this year have markedly slow the pace IPOs at the board. Since its debut, the board has usually accounted for over a third annual listings on mainland China. This share has dropped to 29 percent over the last 10 months. Star has only hosted 60 IPOs compared to a total number of 120 almost a year ago, according to Dealogic data.
The Shanghai tech board raised half the total funds in China last year. This year, it has dropped to just over 40% at $17.4bn. This is only $1bn higher than the total funds raised by Shenzhen’s ChiNext during the same time period. Star could lose its top position among Chinese exchanges for the first year since it was launched.
The slowdown in the market is also a factor that has led to tighter controls for start-up listings. The Star Market 50 benchmark index has lost more than a quarter of its value from its peak in April. In August, the China Securities Regulatory Commission (CSRC) announced a plan “temporarily tightening IPO approval” to achieve a dynamic balance between supply and demand of new stocks.
The poor financial performance of start-ups after their IPO has been a more significant trigger for policy reform. This has led to concerns about whether a board with primarily tech-savvy members can generate winners.
According to official records, three quarters of Star Market listed companies exempted from the revenue and profit requirements never broke even after going public.
Thomas Wang, a Shanghai based private equity fund manger who worked on Star Market listings said: “These lossmaking companies had a very poor track record of becoming profitable after IPOs. This caused investors to suffer.”
Wang explained that this has led regulators to limit the access to the market to only those companies who have more established operations.
He said that in the past the Shanghai Stock Exchange was happy to accept a company scoring 65 out 100 for Star Market, but now the threshold has been raised to 85.