THE Shanghai Stock Exchange, fearful of losing ground to exchanges both at home and abroad, said it is considering the creation of a new board to host the initial public offerings of fast-growing technology companies.

The move comes as high fliers like Alibaba, Weibo and JD.com are looking to US markets to raise funds and as the Nasdaq-style ChiNext board in Shenzhen helps propel the southern exchange to higher prominence over Shanghai.

“The proposal to create a new board for the emerging industry sends a significant signal that Chinese mainland capital market welcomes high-growth and innovative companies,” said Gao Jianbin, technology leader for PricewaterhouseCoopers China.

Earlier this month, micro-blogging site Weibo filed for a US$500 million listing in the US, while Alibaba, China’s biggest e-commerce operator, said it would be seeking a US$15 billion in a New York listing.  JD.com was also reported to be looking at raising an estimated US$1.5 billion in New York.

All three companies are registered in the tax haven of the Cayman Islands, rendering them “foreign companies,” which are barred from listing in China’s domestic market. Alibaba shunned a listing in Hong Kong after it was refused an exemption to the Hong Kong Stock Exchange’s strict “one share, one vote” policy.

While Chinese technology company listings in the US are nothing new, the scale of these tech giants is. Some analysts said Alibaba’s initial offering could potentially end up bigger than Facebook’s.

Shanghai Stock Exchange General Manager Huang Hongyuan said the trend underscores the failure of Chinese markets to create an environment for such companies to float at home.

More needs to be done, he said, to cater to companies with low profits but high profiles.

Liu Shengjun, deputy executive director of the China Europe International Business School’s Lujiazui International Finance Research Center, agrees. He said China needs Nasdaq-style rules that allow companies with special ownership structures to go public.

Chinese regulatory requirements on assets and income scales and on profitability and growth, coupled with market volatility, interference in IPOs and the lack of transparency in the listing process, are forcing non-traditional companies to overseas markets.

Liu said the Shanghai Stock Exchange, in considering the creation of a new board, is reacting to its loss of position as the country’s leading stock market.

“In a recent ranking released by a British consultancy firm, the Shenzhen Stock Exchange overtook the Shanghai Stock Exchange,” he said. “I think the reason lies in ChiNext. The proposed new board is similar to ChiNext. It certainly would boost the attractiveness of the Shanghai exchange.”

Shenzhen’s ChiNext board specifically caters to what it describes as “enterprises engaged in independent innovation and other growth venture enterprises.” Its flexible listing requirements have attracted domestic technology listings.

Big gap

The gap is clear. Since the lifting of the 14-month IPO freeze in January, 48 companies have listed — six in Shanghai and the rest in Shenzhen, including 24 on ChiNext. About 700 IPOs are expected in China this year.

ChiNext, launched in October 2009,  has posted a nearly 90 percent surge since the beginning of 2013, but memories of its turbulent first few years persist.

Overpriced IPOs, insiders grabbing “stag” profits from soaring debut prices, disappointing follow-up performances by many of the original 28 listed companies and several accounting scandals contributed to an erosion of investor confidence.

Some analysts are warning of mounting risks for ChiNext now because of overvaluation and over-optimism. It’s all a bit reminiscent of the dot-com crash in the late 20th century, when the tech-heavy Nasdaq dived to 2,000 from a record 5,049 within the space of a few months.

Concern about a new Shanghai board creating undue competition in domestic markets harks to the similar rivalry between the New York Stock Exchange and Nasdaq in recent years. The Nasdaq composite board has generally been the bourse of choice for high-growth, innovative firms in the US. Its bigger names include Apple, Microsoft, Google, Amazon and Intel.

However, since the botched Nasdaq float of Facebook in 2012, which culminated in system freezes, plummeting share prices and eventually lawsuits, the New York Stock Exchange has gradually moved into high-growth territory. In 2013, it struck a major blow by securing the float of micro-blogging site Twitter and has since moved to capture the tech market more aggressively.

A new Shanghai Stock Exchange board, according to Liu, could fuel a similar rivalry in domestic markets.

Recent moves by China’s top securities regulator should lend a hand to the Shanghai exchange. The China Securities Regulatory Commission said last month that companies seeking to go public are free to choose either the Shanghai or the Shenzhen exchange, regardless of the size of their IPOs.

Previously, companies with IPOs of less than 50 million shares were required to list on the Shenzhen Stock Exchange.

PwC’s Gao said the benefits of a new board in attracting technology, media and telecommunications floats back to China would far outweigh any rivalry concerns.

Market force

“What is needed is to let the market play a decisive role over regulatory power,” he said. “But it’s a gradual process that will not happen overnight.”

The level of investor education in the country is also problematic to the tech market, he added.

“China’s capital market is dominated by traditional industries, which are relatively familiar to investors,” Gao said. “While technology, media and telecommunications companies usually engage in innovative businesses, some of them may be little-known. Thus, investing in those industries requires higher awareness of risk assessment and certain sophistication.”

He said he is confident that securities regulators have begun to understand the nature of technology, media and telecommunications companies that are high growth but may be unstable in revenue and profits.

“I think Chinese companies that are listed overseas will come back to the domestic market as the regulatory environment and risk tolerance improve,” he said.

Aside from systematic difficulties, China’s stock markets face ongoing performance issues.

A strong appetite for high-growth tech stocks has been key to high valuations in the US, leading to more interest from those considering IPOs. Wall Street has been bullish this year despite disappointing economic results in both China and the US.

Although tech shares continue to soar, suggesting that fears over a possible tech bubble are easing, fund managers are divided on whether the high price-earnings ratios of “innovative” companies are justified or just speculation-driven.

By contrast, China’s shares have been underperforming, with the CSI 300 closing at 5-year-lows last month.

The divergence of Chinese and US stock markets since the global financial crisis, despite significantly stronger economic performance in China, has been a paradox in itself. Analysts have blamed local investor fears of a possible asset bubble, a slowdown in the nation’s economic growth rate and worries about lax regulatory oversight of listed companies.