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China launches ChiNext - a Nasdaq style secondary stock market

By Jim Trippon

China has officially launched ChiNext, a new Nasdaq-style secondary stock market for start-ups.

The launch of ChiNext signals two policy shifts from Beijing. Although China’s leaders have routinely been focused on growing and stimulating giant State Owned Enterprises, also known as SOEs, this move shows an understanding of the importance of small business.

As in America, Beijing finally recognizes that most sustainable job growth comes from “Small and Medium-sized Enterprises.” Those are “SMEs” in the Chinese jargon.

Another key realization coming from China is that the state is failing to innovate in the way that western industrialized nations routinely do. It’s all very well to produce cheaper copies of steam shovels and electric motors but copying won’t create many more new jobs. Innovation will.

The opening of ChiNext in Shenzhen (a train-ride from Hong Kong) comes as China seeks to find new sources of long-term economic growth and shift its economy away from traditional manufacturing towards innovative, higher-value industries. As the Securities Regulatory Commission told Reuters, “It is very significant to the development of China’s capital market, as well as to sustainable and healthy development of China’s economy and society.”

ChiNext is designed to fund innovation and risk-taking. That’s one reason Chinese leaders have been so slow to get this exchange going. Even as they opened it, they warned that it could be a very turbulent first six months for ChiNext. Beijing has been afraid that waves of euphoria or panic could spread to the big board in Shanghai.

Some great Chinese non-state companies like Baidu (BIDU) and Ctrip (CTRP) were desperate for startup capital, and had to turn to New York’s NASADAQ for funding. ChiNext hopes to make funding of innovative startups much easier.

The first batch of 28 enterprises will be officially listed and start trading next Friday. Among the 28 firms to be listed on ChiNext, six are new energy and new material companies, six in the pharmaceutical and medical equipment business and the rest are in advanced manufacturing, information technology and modern service industries.

The first batch of firms’ have average price/earnings (PE) ratios of more than 55. Some companies have P/Es greater than 80! That means it’s going to be a wild ride as these firms find their real values on a new market, with relatively inexperienced traders.