Shanghai’s answer to Nasdaq outstrips Hong Kong amid Chinese tech frenzy

Shanghai’s answer to Nasdaq is benefiting from a wave of investor frenzy for Chinese technology stocks, outperforming rivals including Hong Kong by the widest margin since its inception.

The Star 50 index, which includes leading stocks on the city’s Star Market, has risen by 23 per cent this year. It is well ahead of the tech index in Shenzhen, which is up 10 per cent, and far better than the 14 per cent decline for Hong Kong’s Hang Seng Tech Index.

CXMT and Unitree, which made blockbuster debuts in Shanghai last month and this week respectively, are yet to be included in the Star Index — meaning its gains would be even greater had they been.

The recent uptick in top companies choosing to list in Shanghai rather than Hong Kong comes as Beijing becomes increasingly concerned about capital flight and ensuring its top technology companies remain under domestic control.

China’s financial regulators have “focused on the Star board as the primary priority”, said Jason Lui, head of Asia-Pacific equities and derivatives strategy at BNP Paribas, who added that it had benefited from “strong policy backing”.

The Star Market was established in 2019 as part of Beijing’s efforts to finance domestic innovation as tensions with the US over key technologies mounted.

Star had looser profitability requirements that allowed companies involved in “hard technology”, which includes industries such as semiconductors, robots and new materials, to list relatively quickly.

Beijing pursued this policy partly because of the mainland’s relatively shallow market for venture capital cash.

The policy has helped Shanghai become a hub for China’s rapidly growing semiconductor sector. Some of the exchange’s top constituents include Hygon Information Technology and Cambricon Technologies — two chipmakers that are central to Beijing’s push for semiconductor self-sufficiency.

The Star Market’s success is prompting changes in Shenzhen and Hong Kong that want to become more attractive venues for Chinese tech listings.

In April the Shenzhen Stock Exchange announced a new set of rules supporting unprofitable but innovative firms that resemble the regulations for the Star Board.

Last month HKEX unveiled less stringent listing standards that included allowing smaller companies to use a weighted voting rights structure popular among tech founders wanting to retain more control over their firms.

Hang Seng and the Hong Kong Stock Exchange are reforming their tech indices to include companies such as Z.AI, MiniMax, GigaDevice and Montage that have added listings in Hong Kong this year.

The risk for the city is that the Chinese technology companies trading in Hong Kong could become less relevant as more innovative companies arrive on mainland markets. “Hang Seng Tech is all the old tech,” said Wee Khoon Chong, a senior strategist at BNY.

Earlier this month Hang Seng Indexes proposed overhauling its methodology to expand the number of constituents in the Hong Kong tech index from 30 to 50 and include sales growth as well as market capitalisation as selection criteria. Meanwhile, HKEX said this week it was overhauling its Tech 100 index.

The measures include reducing the maximum weight in the index for a single company to 8 per cent. That will in effect reduce the weightings of Alibaba and Tencent — two of China’s stock market laggards this year.

Despite the changes by Hong Kong, authorities prefer Chinese companies behind strategically important technologies such as semiconductors and other physical “hard technology” to first list on the mainland, said Joanna Yang, a portfolio manager at Ninety One.

This preference is partly to reduce outflows at a time when Beijing is increasingly concerned about capital flight from mainland China.

Recommended

“If all these good assets go to Hong Kong for listing, all these Chinese investors would try and get their money out of China,” said Qingyuan Lin, China semiconductors analyst at Bernstein. “They’re trying to retain good assets in China so local money stays on local exchanges.”

However, Hong Kong continues to play an important role for Chinese tech firms looking to raise funds for overseas expansion.

There have been 41 tech listings in Hong Kong this year, compared with 16 for the Star Market.

Bernstein’s Lin said Hong Kong was also important for mainland Chinese firms looking to attract global talent because issuing shares in the territory permits companies to issue stock incentives for foreign hires that are not encumbered by capital controls.