2020: A Year for Chinese Stock Exchanges
Referenced sources: The Wall Street Journal, Trading Economics (for GDP data), Photo: Chinatopix via AP.
2020 has been a momentous year for the Shanghai, Shenzhen, and Hong Kong stock exchanges. So far, these Chinese exchanges have collectively raised $76 billion, 43% of the global total. The top performers thus far have been Hong Kong (HKEX) and Shanghai (SSE) with the new STAR Market playing a pivotal role.
The recent success is due to at least three factors: a unique coronavirus recovery, the STAR Market, and mainland Chinese firms seeking additional listings. China is the only large economy in the world that has both recovered from its first-quarter economic contraction (of 6%+) and that is projected to exhibit GDP growth in 2020 upwards of 4.5%. China has successfully handled their coronavirus outbreak, a feat that has translated to a v-shaped economic recovery. This has enabled Chinese firms to escape a variety of domestic economic problems that have plagued firms overseas in both the developed and developing world.
Caption: The government-imposed lockdown around January of 2020 initiated the first-quarter economic contraction. Following January, GDP rapidly recovered as the country opened up.
Secondly, the STAR Market has been a success since its launch in 2018. Incorporated into the SSE with a relaxed set of IPO rules, STAR is a science and technology-focused exchange that has raised more than $22 billion this year. This brand new market is attractive to mainland Chinese firms that wish to avoid auditing requirements in the United States, high-tech and high potential enterprises with market valuations as low as $3 billion, and firms with international operations. According to the Asia-Pacific global capital markets division of Bank of America, an underlying attraction to STAR is unique access to investors that have difficulties accessing the U.S. market.
Third, mainland Chinese firms seeking additional listings have been a driving force behind the surging stock market. This trend breaks down in terms of individual firms seeking secondary listings themselves or seeking IPOs for subsidiaries. Hong Kong-listed firms have raised $11 billion from STAR secondary listings. This trend is expected to continue and two firms serve as prime examples. A U.S.-listed Chinese solar power company, JinkoSolar Holding Co., is planning to list a subsidiary on STAR and Alibaba’s Ant Financial is planning a dual listing on the SSE and HKEX for its nearing IPO.
The improvement of the Chinese stock market within the last year can be attributed to both (1) the Coronavirus outbreak that has stratified global economic recovery, giving China a competitive edge, and (2) the fundamentals of the SSE and HKEX. While the country’s 43% share of the global total for funds raised is expected to shrink marginally in the short term, SSE (including the STAR Market) and HKEX fundamentals are expected to catapult the growth of the country’s financial markets forward. In other words, the 43% figure will most likely shrink in the short term but grow in the long term.