- China removed mention of a growth board from five-year plan
- Investors expected Ant Financial, IQiyi to list on new market
China’s government has gone silent on a plan to introduce an easier -- and more lucrative -- way for the nation’s mushrooming crop of Internet champions to raise cash. Now, investors fear the much-anticipated exchange that was scheduled for a rollout this year may have been mothballed.
In an omission viewed as significant, the government left out the phrase “setting up strategic emerging industries board” from its latest economic five-year plan spanning 2016 to 2020. If that signals a suspension of plans for a tech-friendly bourse, it would cast yet more uncertainty over investors’ exit strategies for Internet companies, many of which are de-listing from U.S. exchanges to seek higher valuations back home.
The envisioned board in Shanghai had been expected to carry lower listing requirements and offer a fresh fund-raising venue for emerging companies including Alibaba Group Holding Ltd.’s financial affiliate and Baidu Inc.’s video service. Speculation about a delay sent Chinese small-caps surging this week, as investors bet that Internet companies will now buy smaller or shell companies to obtain a back-door listing, side-stepping a lengthy approval process for a traditional exchange debut.
“If the new board is delayed it would wreak havoc on a lot of these Internet companies that were waiting to list in China at good valuations,” said Li Yujie, an analyst with RHB Research Institute Sdn in Hong Kong. “They could wait, or buy shell companies, or list in the U.S., where valuations would be much lower right now.”
Adding to the uncertainty, China’s plan to streamline rules for initial public offerings are also unlikely to be implemented this year. Those now waiting in the wings include Zhejiang Ant Small & Micro Financial Services Group -- the Alibaba affiliate said to be worth about $60 billion after its latest financing round.
The Beijing Evening News reported that the emerging board proposal was removed at the suggestion of delegates to this month’s meeting of the National People’s Congress. Ant Financial declined to comment on the implications for the company in an e-mailed statement. IQiyi.com Inc., Baidu’s video-streaming affiliate, declined to comment. The State Council, which as China’s cabinet is the main architect of the five-year plan, didn’t respond to a faxed query. A press official from the Shanghai Stock Exchange declined to comment.
On Wednesday, 34 domestic A-share-listed companies with a market value of below 2.5 billion yuan ($386 million) rose an average of 4.6 percent, according to data compiled by Bloomberg. The “shell value” of such companies is rising as the reported deletion of the emerging board will force companies ineligible for IPOs to seek out a back door, said Wei Wei, an analyst at Huaxi Securities Co. in Shanghai.
Plans for a strategic exchange catering to technology-oriented companies emerged last year as the government sought to spur economic growth through industry innovation and domestic consumption.
Cash-strapped startups and private tech companies need money to bankroll the marketing and costly subsidies crucial to gaining users in a fiercely competitive environment. Many lack track records of profitability as a result.
Among the attractions of a domestic listing are lofty valuations several times higher than in the U.S. or neighboring Hong Kong. That rift has encouraged companies like Qihoo 360 Technology Co. to consider abandoning their U.S. listings and explore IPOs at home.
The new market was expected to play host to larger companies than on Shenzhen’s ChiNext, which is dominated by fledgling startups and has tripled since the start of 2013 versus a more modest 28 percent gain for the Shanghai Composite Index. Its potential postponement comes on the heels of a stock market rout since last June, which shook investor confidence and spurred concerns of fallout for the wider economy.