A record number of companies have dropped plans to list on Shanghai’s tech-focused stock market, with regulators raising the bar for initial public offerings in order to pick out domestic champions that can help Beijing’s drive towards technological self-sufficiency.
Public records show 126 companies have cancelled or suspended IPO applications on Shanghai’s Star Market so far in 2023, more than in the previous four years combined.
The city’s stock exchange, acting on guidance from regulators led by the China Securities Regulatory Commission (CSRC), has set higher standards for listing applications this year, according to bankers and filings, in what amounts to a radical reversal in China’s approach to encouraging innovation.
Companies must now not only turn a profit but also explain in hundreds of pages how their technology is on par with, if not better than, industry leaders and whether their business model is sustainable before getting the IPO green light.
That has made a Star Market listing beyond reach for many start-ups, even though the board was originally launched with the intention of providing access to capital markets for companies with high-risk profiles.
While the authorities expect the growing regulatory scrutiny to help channel resources to what they see as the best-qualified companies, analysts said the effort might end up undermining innovation by denying funding opportunities to high-potential start-ups.
“The Chinese government is basically saying: ‘I am not going to put the country’s muscle behind any company that doesn’t have a guaranteed success’,” said Andrew Collier, managing director of Orient Capital Partners in Hong Kong. “It is way too political a policy to be successful.”
“Letting regulators decide which high-tech companies should go public is like asking an eight-year-old child to choose the best moon-landing technology,” said Chen Zhiwu, a finance professor at the University of Hong Kong. “It will never succeed.”
The CSRC said in a September announcement that it would support qualified companies with “crucial and core technologies” to grow strong by listing on the STAR Market. “There is no such thing that the listing requirements have been tightened,” it said at the time.
When the Star Market was founded in 2019, companies did not need revenues or profits to file for an IPO, just a market value of at least Rmb4bn ($550mn) and products with “significant market potential and technological strength”.
However, public records show just one company with no profit and less than Rmb10mn in revenue has gone public on the board this year, a drop from eight in 2022.
“The market is no longer available for lossmaking start-ups even though it is designed for them,” said James Li, a Shenzhen-based investment banker who has worked on IPOs on the technology board.
In a regulatory inquiry in July, the Shanghai stock exchange asked Yeestor Microelectronics, a Shenzhen-based manufacturer of flash memory control chips that filed for a Star IPO last year, whether a drop in its global market share suggested the company was lagging behind its peers in new product launches and tech upgrades.
“The regulator isn’t convinced we are still the market leader, and it only wants the best company to be listed,” said an official at Yeestor.
Public records show almost two-thirds of IPO applicants failed to win approval in the first nine months of this year, compared with less than a quarter in 2022.
“The regulatory environment isn’t friendly for us,” said an official at Beijing-based TransGen Biotech, a biological reagent maker that this month withdrew its Star Market listing plans after receiving more than 100 regulatory inquiries, including why the company’s sales were “small despite spending a long time in the business”.
The cancellations this year have markedly slowed the pace of IPOs on the board, which since its debut has typically accounted for more than a third of annual listings in mainland China. That share has fallen to 29 per cent over the past 10 months during which Star has hosted just 60 IPOs, compared with a total of almost 120 last year, according to data from Dealogic.
And while funds raised on the Shanghai tech board accounted for half of China’s total last year, that share has fallen to about 40 per cent this year at $17.4bn. That is just $1bn more than the total raised on Shenzhen-based rival ChiNext over the same period, putting Star at risk of losing the top spot among Chinese bourses this year for the first time since its launch.
Sluggish market conditions are also partly to blame for tighter controls on start-up listing. With the benchmark Star Market 50 index losing more than a quarter of its value since its April peak, the China Securities Regulatory Commission announced in August a plan to “temporarily” tighten IPO approval so that the supply of and demand for new stocks could achieve a “dynamic balance”.
A more important trigger for the policy overhaul has been the anaemic post-IPO financial performance of many start-ups, which has raised concerns over whether the tech-heavy board can help generate new winners.
Official records show three-quarters of Star Market-listed companies that were exempt from revenue and profit requirements have never broken even since going public.
“These lossmaking firms had a very bad track record in becoming profitable after their IPOs and that caused investors to suffer,” said Thomas Wang, a Shanghai-based private equity fund manager who has worked on Star market listings.
That has prompted regulators to make the market available only to companies with more established operations, Wang said.
“If the [Shanghai Stock Exchange] was comfortable with a company with a score of 65 out of 100 to list on Star market in the past, now the threshold is 85,” he said.
Additional reporting by Hudson Lockett in Hong Kong