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Shanghai Is Being Thrust Into the High-Stakes Tech I.P.O. Race

Category: Business,Finance

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President Xi Jinping of China is opening up Shanghai to the world of technology public offerings.

Mr. Xi said that a new science and innovation equity bourse in the city would be used to host tech companies. It is supposed to test a new listing system, where companies would simply register their intention to conduct an initial public offering, as in the United States, instead of seeking regulatory approval.

It is an overdue reform, but officials may rue the volatility that it will probably bring.

The Shanghai Stock Exchange, with a market capitalization of over $4 trillion, aimed to become an international venue equivalent to New York’s Nasdaq by 2020. But that goal has been quietly abandoned. It struggles to compete with the Shenzhen bourse, which attracts start-ups to its ChiNext market. Hong Kong, too, increasingly woos the likes of Xiaomi.

Shanghai, meanwhile, is an overweight state-owned dinosaur. But after years of lobbying Beijing for help attracting tech outfits, it finally got its wish.

A long-promised registration-based listing system will replace the tedious process of applying to the China Securities Regulatory Commission for permission to sell shares. Authorities closely manage the pace and pricing of initial public offerings, resulting in a backlog of hundreds of companies. When indexes correct, the commission also tends to freeze approvals because mom-and-pop investors tend to think new issues suck money away from existing stocks.

The system warps China’s primary market. Price guidance, at 23 times earnings, has resulted in huge first-day trading jumps, with shares almost always rising by the maximum 44 percent. That, plus scarcity, turns I.P.O.s into one-way bets with double-digit returns. The difficulty of listing also makes tickers themselves valuable, so shares in dual-listed companies such as Bank of China cost an average 20 percent more on the mainland than in Hong Kong.

Letting companies decide when to list, and for how much, would eliminate such distortions — but not painlessly. Companies that are most likely to list on the new Shanghai board will be small and private, and those businesses are not prone to best-in-class corporate governance. The history of new markets in China also suggests there is a high chance for shareholder abuse in early the early days. Indexes could suffer if retail buyers react by selling.

The biggest risk, however, is that short-term pain causes officials to reverse this long-overdue liberalization, as they have done before. For now, that makes the Shanghai board itself less a more of a “hold” than a “buy.”


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