Why China's STAR Market, New Rival to Nasdaq, Is Crashing to Earth

China's STAR Market exchange, whose tech stocks soared to stratospheric heights in the market's opening days this summer, has crashed to earth. Since opening, the exchange's trading volume and share prices have plunged, dampening initial optimism that China can create a securities market that can compete with the hugely successful Nasdaq, which has spawned a long list of legendary tech companies. STAR's decline is detailed in a Wall Street Journal as outlined below.

The formal name of the Shanghai Stock Exchange’s tech market is the Science and Technology Innovation Board. It's the third effort by China to create a competitive tech exchange and comes as China and the U.S. are locked a battle over economic leadership that's heated up amid a trade war. 

What It Means For Investors

Since its first day of trading in July, STAR's trading volume has plunged by more than 90% for many stocks. For example, 29 million shares of Suzhou HYC Technology Co., the market’s first publicly listed firm, were traded on its first day. Just seven days later, that number dropped to 13.6 million, and proceeded to fall sharply to 2 million by Oct 18, a 93% decline. 

Sky high valuations have hurt many of the STAR-listed companies. This has led investors to buy shares of the same companies at much lower valuations on other China exchanges.

A sign of the exchange's distress is that that STAR has delayed the launch of an index that would track the overall performance of the tech board for its 33 companies. Some see this as sign that the Chinese exchange is worried about its historical performance, per the Journal. STAR said it would launch the index in July when the number of companies expected to trade on the exchange was 30. 

One challenge facing the exchange is that Chinese equity markets are dominated by retail traders, who employ speculative strategies rather than buy-and-hold investing, per the Journal.

To make matters worse, IPOs also have fallen well below expectations. “We originally expected there would be around 100 companies to list on Star market this year,” said Edward Au, co-leader of the National Public Offering Group at Deloitte China, as cited by Bloomberg. He now expects a few dozen, at best. 

A Look Ahead

The Shanghai tech exchange's shortcomings highlight a stark reality for young tech, cash-hungry companies in China. Just as in the past, these emerging companies will need to raise much of their money in U.S. capital markets - not in China - to fuel their growth.