When the gong was sounded back in July to mark the first day of trading at Shanghai’s Star Market, which was hailed by state media as China’s answer to Nasdaq, expectations were sky-high.

The first 25 companies to list on the board, run by the Shanghai Stock Exchange, were seen by analysts as just the first wave, with some predicting the number would hit three figures by the end of the year. Unleashing this potential would be Star’s listing regime, in which regulators played a limited role in the approval process and had no say over how shares priced or when they came to market, unlike other bourses on the mainland. Back then more than 140 technology and science companies had signed up to join the new board, aiming to raise a total of Rmb128.8bn ($18.1bn).

But the flood has slowed to a trickle. Just five more companies have sold shares since then, raising about $826m in total.

“It does seem to have all run a bit dry,” said Fraser Howie, a longtime follower of China’s markets and co-author of Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.

Analysts say the vetting process has turned out to be more cumbersome than originally pitched, with officials at the SSE keen to avoid approving any companies that could cause reputational damage to China’s President Xi Jinping, who unveiled plans for a new destination for start-ups and unicorns last November. Star would support Shanghai in “cementing its position as an international financial centre and a hub of science and innovation,” Mr Xi said at the time.

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Mr Howie said officials at the Shanghai exchange had expressed a desire to pack the board with high-quality technology companies, “not fluff valuations”.

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But by some measures, there is still a lot of giddiness. Take Jiangsu Cnano Technology, a little-known company that produces carbon nanotubes, and which was founded eight years ago. Shares in the company began trading last Wednesday and finished the week up 176 per cent on their initial public offering price.

That gave Cnano a price-to-forward earnings multiple of 97 — more than eight times the ratio of the broader Shanghai market, and four times that of New York-listed Alibaba, arguably the most successful Chinese tech company to go public.

There is no official gauge tracking Star stocks’ performance, although Shanghai’s exchange is due to launch the Star 50 benchmark in October, after a week-long national holiday. It is well short of that total.

Brock Silvers, managing director at Shanghai-based private equity investment firm Kaiyuan Capital, said there had been tension between Beijing’s desire to bring start-ups to market and long-term investors’ desire to invest in durable companies amid an economic slowdown and trade conflict with the US.

“Everything boils down to issuance quality, and if Beijing persists with its tech [venture capital] vision, where every entrepreneur sees a unicorn in the mirror, then Star will ultimately follow ChiNext,” he said. He was pointing to China’s earlier attempt at a tech-focused board in Shenzhen, which has mostly failed to draw big listings away from Hong Kong or New York.

For now, shares on Star have yet to come too far off their early gains. The total market capitalisation of the first 25 stocks to list has barely budged since the end of its first week, while trading volumes have fallen.

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Alexious Lee, head of China capital access research at broker CLSA, said the cool-down in activity on the Star Market was in line with policymakers’ aims of encouraging lower volatility. “I think they’re at the stage of fine-tuning these reforms and analysing how those could be blended into the broader market,” Mr Lee said.

But Star is still affected by the sharp price swings that policymakers had hoped to smooth out, by granting trading licences only to investors with at least two years’ trading experience and funds of a minimum Rmb500,000. Share prices continue to pop on day one — one hallmark of a speculative market — with typical percentage gains well into the triple-digits.

Daniel So, a strategist at CMB International Securities, said those first-day leaps suggested that retail investors who dominated trading across the broader market were still making their presence felt on Star, despite rules meant to ensure that more sober institutional investors held greater sway.

“When investors see a correction is coming or has just begun, then the money will pull out,” he said. “The huge valuations just can’t be justified.”

Indeed, the average forward P/E multiple for the 30 Star stocks listed so far is just over 100, according to data from Wind. Gerry Alfonso, a director at Shenwan Hongyuan Securities, said it would probably take a few quarters’ worth of earnings reports for stock valuations to come down.

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Mr Howie agrees that it is too soon to pass judgment on Star. But he voiced concerns based on talks with stock exchange officials in Shanghai, who had expressed a desire to keep companies they considered sub-par out of reach of investors.

“It did worry me very much that they were trying to pick winners,” he said. “The evidence so far is there’s not many winners.”

Via Financial Times