Just as the shiny new ChiNext stock exchange prepares to debut in Shenzhen on Friday, the main board in Shanghai suffers its worst trading day in five weeks, dropping 2.8pc to 3,021.46 at the close. Shenzhen dropped 2.9pc.
Much of the fall came about because lower oil, copper and other commodity prices dented producers such as PetroChina, Jiangxi Copper and Datong Coal.
However, there are also fears that the index has reached a high-water mark thanks to the swell of stimulus cash, and that there’s little to support it now the wave is retreating.
“We’re cautious on the market as valuations are quite high,” said Wang Weijun at Zheshang Securities to Bloomberg. The average trading multiple of a stock in Shanghai is 33.31 times.
If investors are cautious at that level, they may find the 55 times earning multiples of the 28 companies on ChiNext a bit difficult to swallow.
The idea behind ChiNext is to provide an index for small and medium sized businesses to raise cash. Companies like Baidu, which had to turn to Nasdaq in its early years, could now find their first home here, the regulators say.
The first set of companies to list are mostly privately held. Six are energy and materials technologies firms, six are pharmaceutical and medical equipment companies and the rest are in IT or advanced manufacturing. They have been chosen from 188 applicants and should raise 15.5 billion rmb on listing.
It will be interesting to see whether Chinese investors are willing to punt on private firms, rather than the state behemoths that populate the bigger indexes.
And finally, Chinese venture capitalists will be able to cash out of some of their investments, which may stimulate further funding runs for other SMEs.
Even if ChiNext is wildly successful, however, it will still be a tiny index. And if the government really is serious about funding to SMEs, why doesn’t it allow them to raise more money from the banks?