The number of companies abandoning their plans to list on Shanghai’s technology-focused stock market has reached a historic high. This shift comes as regulators have raised the requirements for initial public offerings (IPOs) to identify domestic champions that can support China’s pursuit of technological self-reliance.
In 2023, a total of 126 companies have either canceled or postponed their IPO applications on Shanghai’s Star Market, surpassing the combined figures for the previous four years. The Shanghai stock exchange, under guidance from the China Securities Regulatory Commission, has significantly increased the standards for IPO applications, representing a significant departure from China’s previous approach to promoting innovation.
Now, companies are not only required to be profitable but must also provide extensive documentation, spanning hundreds of pages, demonstrating that their technology is on par with or superior to industry leaders. They must also prove the sustainability of their business model before receiving approval for an IPO. These stringent requirements have made it exceedingly difficult for many startups to access the Star Market, even though the board was originally designed to facilitate capital market access for high-risk profile companies.
While authorities anticipate that this increased regulatory scrutiny will redirect resources to the most qualified companies, analysts are concerned that it may hinder innovation by denying funding opportunities to promising startups. In essence, the Chinese government appears to be saying that it will only support companies with guaranteed success, a policy that is viewed by some as overly political to be effective.
This approach of allowing regulators to determine which high-tech companies can go public has been criticized as being akin to having a child select the best moon-landing technology and is unlikely to succeed, according to Chen Zhiwu, a finance professor at the University of Hong Kong.
Despite the claims of the China Securities Regulatory Commission that listing requirements have not been tightened, the Star Market’s initial standards have evolved since its establishment in 2019. Initially, companies did not need to show revenues or profits to file for an IPO; they only needed to have a market value of at least Rmb4bn ($550 million) and products with significant market potential and technological strength. However, this year, only one company with no profit and less than Rmb10 million in revenue has gone public on the board, a significant reduction from the eight in 2022.
The stringent regulatory environment has also led to a majority of IPO applicants failing to gain approval in the first nine months of this year, compared to a much lower percentage in 2022. Some companies, like TransGen Biotech, have withdrawn their Star Market listing plans due to extensive regulatory inquiries.
The increase in cancellations has notably slowed down IPO activity on the Star Market, which traditionally accounted for over a third of annual listings in mainland China since its debut. This share has dropped to 29% in the past ten months, with Star hosting only 60 IPOs, compared to nearly 120 in the previous year.
Furthermore, the funds raised on the Shanghai tech board, which represented half of China’s total in the previous year, have decreased to about 40% this year, totaling $17.4 billion. This is just slightly more than the amount raised on the Shenzhen-based rival ChiNext over the same period, which puts Star at risk of losing its leading position among Chinese bourses this year for the first time since its launch.
Market conditions, along with the Shanghai Star Market 50 index losing more than a quarter of its value, have contributed to the tightening of controls on startup listings. In response, the China Securities Regulatory Commission temporarily tightened IPO approvals to achieve a dynamic balance between supply and demand for new stocks.
The main driving force behind this policy overhaul has been the underwhelming post-IPO financial performance of many startups. This has raised concerns about whether the tech-heavy board can generate successful companies. Official records reveal that three-quarters of Star Market-listed companies, exempt from revenue and profit requirements, have never achieved profitability since going public. This has led regulators to restrict market access to companies with more established operations and a higher level of confidence in their success. In the past, a company with a score of 65 out of 100 could list on the Star market, but now, the threshold has been raised to 85.