China's Nasdaq: too much too soon?
Nov 06, 2009
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China's investors are used to sharp ups and downs. But the volatility on the supposed Nasdaq-equivalent ChiNext (a new exchange for small, fast-growing firms) has been in a new league.
Last Friday, when it launched, shares in all 28 firms, some of which were more than 100 times oversubscribed, at least doubled. On Monday, 20 plunged by the daily permitted maximum of 10%. ChiNext is now on a p/e ratio of 70, against 33 for the main market.
The rationale for ChiNext is sound. As David Barboza points out in The New York Times, promising small and medium-sized private firms have scant access to bank lending or equity market listings. Both these areas are dominated by state-owned companies.
But the trouble is that other countries that set up growth markets had mature, well-developed capital markets first, says John Foley on Breakingviews.
Conversely, in China, even the main market is far more volatile and risky than its foreign counterparts. And state interference has meant that even shares of large companies are in short supply, pushing valuations up.
A tendency amongst investors to speculate is also a problem. "Flighty retail investors and shadowy government bodies" hold 80% of the mainland market, says Lex in the FT. Yet growth markets need "patient, long-term investors". So overall, ChiNext "looks like too much, too soon", concludes Foley.
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