China to Launch SSE STAR 50 Index to Track New Nasdaq-Style Board
As the opening of China’s new Nasdaq-style tech board has entered the final countdown, details of the first index tracking its top 50 components have been finalized.
The Shanghai Stock Exchange, the host of the Science and Technology Innovation Board, and China Securities Index Co. Ltd. said they will officially release the index, dubbed the SSE STAR 50 index, on the 11th trading day after 30 companies are listed on the board. The index will follow internationally accepted index compilation methods, using market value and liquidity as the screening criteria to pick 50 stocks with the highest comprehensive ranking, the exchange said.
At the same time, with millions of investors qualified to invest billions of yuan in a limited number of stocks, the market is watching to see whether the first few days of trading will set off great volatility and encourage speculation. The STAR market was set up to permit significantly wider price swings than on other mainland exchanges. Analysts at Citic Securities warned that the conditions are in place for increased speculation on the new board.
The STAR 50 index will be weighted by free float-adjusted market capitalization, subject to a 15% cap per stock to avoid a single stock having too much impact on the index, the exchange said. The index will launch before the number of listed companies reaches 50 because of the need for a gauge to reflect the board’s overall performance as soon as possible, the exchange said. Thirty stocks should be enough to initially meet the diversification requirement, it said.
After 50 stocks are selected, the index will add no more components but will adjust its composition regularly according to market cap and liquidity rules. As more stocks are included, the index will become more representative, the exchange said.
With the new board set to start trading July 22, an initial 25 companies have been cleared for listing, Chang Depeng, a spokesperson with the China Securities Regulatory Commission (CSRC), said Friday at a routine press conference.
The number of listed companies could soon reach 30, as there are more than 100 applicants in line, data from the Shanghai Stock Exchange shows.
The high-tech board, proposed by President Xi Jinping in November, is designed to improve the Chinese mainland market’s appeal to technology companies and encourage them to list at home rather than abroad. A key change is the shift to a market-based registration system for new listings that is intended to resolve the shortcomings of the current lengthy, bureaucratic initial public offering process on mainland boards.
More than 3.8 million qualified investors have obtained authorization to trade on the new board, data shows. Individual investors must have had a daily average balance of at least 500,000 yuan ($72,655) in their securities accounts, according to rules issued by the CSRC.
The Citic analysts laid out the case for possible speculation on the new board. The first batch of 30 companies are expected to raise a total of 30 billion yuan, while the nearly 4 million investors will have at least 400 billion yuan of funds available to pour in the new stocks, analysts estimated. Such an imbalance between supply and demand at the beginning of trading could fuel speculation, Citic’s analysts said.
More volatility is expected also because the new board sets no daily price limits in the first five days of trading for new stocks. After five days, the daily limit will be set at 20% for the new board. On other boards, the current cap on share-price fluctuations on the first day of trading is 44% and 10% a day subsequently.
To prevent extreme fluctuation, the new board has set a temporary trading suspension mechanism. During the first five trading days, trading can be suspended for 10 minutes if a stock rises or falls by 30% from the opening price of the day and another 10 minutes if the price continues to rise or fall to 60% from the opening price.
The CSRC said the suspension mechanism will give the market a cooling-off period and reduce irrational speculation.
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