New star rises in Shanghai

The launch of the STAR Market has won unprecedented attention from the central regulators, capital market and even individual investors, according to Xu Biao, chief analyst at TF Securities. Such attention will last for a very long time, he said, because technological innovation and advancement is the way China can overcome the "middle-income trap", which has seen economic growth slow in rapidly developing countries just as they approach the cusp of prosperity.

"There is strong demand for technology and incubation in China," Xu said. "It will not be changed for the next 10 years. Therefore, the market will show exceptionally high interest in the STAR Market, for technology is the most important driving force of China's economic growth."

In late November, Shanghai's municipal government announced the setting up of a high-tech company incubator to provide more policy and financial support to early-stage startups. Zhang Quan, director of the municipal government's science and technology committee, said the incubator is sure to give birth to STAR Market-listed companies in the near term.

"Capital is the magnifier that can accelerate the development of technology companies and industries," he said. "The integration of technology and the capital market will provide strong impetus to the economy."

It took just 220 days to launch the STAR Market in Shanghai, compared with five years for the SME Board at the Shenzhen Stock Exchange, and 10 years for its ChiNext board.

The Shanghai exchange had received 123 applications from companies wanting to list on the new board by Monday, and two had their IPO registration approved by the CSRC on Friday. The next day, the online trading system for the new board was launched.

Huang Hongyuan, chairman of the Shanghai exchange, said the first companies will start trading on the STAR Market within two months.

The unprecedented speed with which the new tech board has been launched is an indication of its importance to startup companies and long-expected reform of China's capital market, according to industry experts.

The registration-based IPO system it is piloting is the most critical institutional innovation in the A-share market, said Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology in Hubei province.

He said the exchange had implemented fairly transparent and standardized review procedures, and it should be a smooth process to promote them in other submarkets.

"By adopting the registration-based system across more submarkets, market forces will play a more decisive role in resource allocation, raising the A-share market's efficiency in serving economic restructuring," Dong said.

Reviews of IPO applications under the registration-based system focus on verifying whether the filings disclose authentic and adequate information in accordance with related rules. The goal of the reviews is to ensure investors get the information they need to make investment decisions, with the regulators not endorsing or offering any assurance about the investment value of listed firms.

This constitutes a fundamental difference from the approval-based system used by other submarkets in China. Under the approval-based system, regulators decide which companies can be listed by comparing their financial indicators, Dong said.

By doing so, the regulators judge the investment value of the applicant firms, he said, making the reviews a contest won by the firms with the best financial results.

"Such a review mechanism could induce financial fraud, because firms want to 'beautify' their financial reports and win the contest," he said. "And innovative companies often find it hard to get listed because they do not have the stellar historical financial results their peers in mature industries do."

Dong added that registration-based systems also strengthen the market's role by reducing administrative controls in the IPO process, helping to boost regulatory efficiency.