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Friday, September 04, 2020
ChiNext's Reform Key to China's Capital Market Reform
ANBOUND

China's ChiNext has entered the 2.0 era with the listing of the first batch of companies under the registration system. On August 24, the ChiNext index closed at 2684.63 points, up 1.98%, with a turnover of RMB 228.901 billion. All 18 new listed stocks were up from the issue price, with an average increase of 212.37%. The market performance of the first day after the reform of ChiNext indicates that most secondary market investors give recognition to the ChiNext reform. In the face of significant changes in China's external environment and the impact of the COVID-19 pandemic, the implementation of the ChiNext reform has encouraged Chinese investors and brought opportunities to the development of China's capital market. Many people have once again called for the development of "China's Nasdaq," hoping that China can make a breakthrough in the fields of science, technology, and finance, expand the domestic market space, and bring vitality to the Chinese economy.

In fact, from the establishment of ChiNext ten years ago to the emergence of the New Third Board and the recent establishment of the Science and Technology Innovation Board (STAR Market), China's capital market has repeatedly proposed to develop China's financial market by benchmarking Nasdaq Market. However, after many setbacks, this goal has never been achieved. The implementation of the registration system reform on the ChiNext has won acclaim from the market, but compared with the benchmark Nasdaq market, there is still a big gap in the field of technology companies and investment.

In terms of market capacity, huge differences still exist between ChiNext and NASDAQ. Over the past ten years, the number of listed companies on the ChiNext has reached 825, with a total market value of more than RMB 7.88 trillion. The proportion of strategic emerging industry companies has increased to 45%. Pharmaceutical biology, electronics, and computer have become the top three industries with market value. After more than 40 years of development, the U.S. Nasdaq stock market has more than 3,000 listed companies with a total market value of nearly USD 20 trillion. It is the world's largest technological innovation stock exchange and has listed Apple, Microsoft, and other large technology companies with a market value of trillions of dollars. Although there have been some industry leaders with a market value of more than RMB 100 billion listed in the ChiNext, but compared with that of the Nasdaq market, the number of industry leaders in the ChiNext is still too small, and the size cannot be compared.

In fact, since the establishment of the world's first Second-board Market in 1962, 75 Second-board Markets have been set up in more than 30 countries and regions over the decades. But among these "Second-board Markets", only the Nasdaq in the United States can stand out and become the ideal place for high-tech enterprises to list and invest, with its unique advantages. Its main characteristics are tolerance to the development of listed enterprises and the cultivation of market subjects. This is mainly reflected in the strict market supervision, and the the survival of the fittest market mechanism.

Data show that Nasdaq listing conditions are relatively simple, especially for companies in the technology industry. The company can be listed if one of the three conditions is met: the net profit of the company to be listed in the past three years has reached more than USD 750,000; the total market value of the company to be listed has reached USD 50 million; the shareholders' equity of the company to be listed has reached USD 5 million. The reformed ChiNext, which uses a listing mechanism similar to that of the U.S. Nasdaq, is more inclusive of unprofitable companies. However, there are still some gaps compared with the Nasdaq market, especially the perception of investors and corporate valuation. At present, the "three highs" (high valuation, high issuance price, high amount of funds raised) in the ChiNext have been criticized by investors. In the first half of the year, there were 55 IPOs of technology, media, and communications companies in Mainland China, according to PwC. So far this year, China's listed tech companies have a price-earnings ratio of about 60, while Nasdaq's listed tech companies have a price-earnings ratio of 37.

While the Nasdaq market has cultivated many successful technology enterprises, it also has a high culling rate, which realizes the survival of the fittest in the market competition. Data show that the annual delisting of the listed companies in the Nasdaq accounts for 8% of all the listed companies in Nasdaq. A large number of disadvantaged enterprises are eliminated, which actually maintains the vitality of the market and provides an environment for the long-term development of high-quality enterprises. There have been no more than 10 delisting companies on ChiNext over the past decade. Although the A-share market has further standardized delisting rules and strengthened efforts to remove non-compliant and undesirable companies, it remains to be seen whether these measures can be "normalized" before the trust of the market can be established. In particular, some long-existing problems, such as financial fraud, connected transactions, major shareholders' possession of funds, insider trading, and other issues, have hindered the development of China's capital market, including the ChiNext. Therefore, the systematic construction of the legal system, regulatory system, and capital market is needed to make the aforementioned measures "normalized".

The success of Nasdaq in the United States lies in the fact that it has cultivated a series of large technology companies, which would not have been possible without the unique U.S. financial and corporate development environment, system innovation as well as the comprehensive opening to the world. In addition, this has also resulted in a financial environment that is inclusive and encourages scientific and technological innovation. It is generally believed in the market that China's capital market still needs to reform its listing system, trading rules, delisting system, and punishment if it wants to use the Nasdaq market as its benchmark. This not only requires the reform of the capital market, but also the reform of China's overall legalization and marketization, so as to realize China's "Nasdaq dream".

Final analysis conclusion:

The implementation of the ChiNext reform is a key to China's capital market reform, bringing hope to the development of China's scientific and technological innovation companies. However, there is still a long way to go compared with the benchmark Nasdaq in the United States, and it still needs the continuous systematic reform of the capital market to achieve the goal of promoting the development of Chinese technology companies.

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