China’s New Stock Exchange Might Help Companies but What about Investors?

AIPEI, Taiwan (TheStreet) -- Chinese officials have approved opening a new board to trade stocks of fast-growing and innovative companies, a move to make the most of high share prices but not necessarily one that helps offshore investors.

The central government's State Council announced this month its support for opening a "strategic emerging industries board" on the Shanghai Stock Exchange, the official Xinhua News Agency reported.

Such high-level approval often means that followup action is just a matter of time. As proposed in March, the board would allow listings by companies with a certain scale, not just startups, and mimic the ChiNext index in the southern city Shenzhen where shares have traded at worrisome valuations of more than 100 times earnings earlier this month.

The Shanghai board-to-be would advance China's goal of fostering private enterprise instead of the $10 trillion economy's traditional mainstay of state-owned companies. In another sign of that support, regulators have opened the gates to initial public offerings this year, with 23 on the books for June alone.

"Emphasis this year is to shift enterprise funding from the shadow banking system to the more regulated financial system, so corporate bonds and equities, and the new board seems consistent with that kind of macro theme," said Tim Condon, head of Asia research at ING Financial Markets in Singapore.

 With existing Chinese markets reaching record highs this year, regulators may figure now is the time to start another board.

"There is an element of opportunism there, why not strike when the iron is hot?" Condon said. But investors, particularly retailers from offshore, would face a list of risks. High valuations and the threat of a bubble market reflected by this month's Chinese "A" share decline are expected to extend quickly to the new board.

IPOs also divert liquidity away from the broad market, limiting access to shares that are already restricted to 271 foreign institutions with investment quotas from the Chinese government. The new board would add Chinese ADRs in the United States and give more options to U.S.-listed funds that trade or track shares in emerging Chinese companies, giving American investors a shot.

thestreet.com