To investors in the chinese stock market They have done very well this year. The composite index of Shanghai is up 13% from a multi-year low in February, despite a recent decline. Both stock analysts and state media They are applauding. For Xi Jinpingthe leader of China, the rebound was a relief, as retail investors own at least 80% of the market. An earlier defeat seriously hurt them and increased anxiety about the country’s future. For many, the recovery reflected good governance and fortune.
Part of the rally came from the purchase of tens of billions of dollars worth of shares by the “National team”, a group of state institutions that come to the rescue when Chinese markets falter. For Xi, the bill may seem worth it. But The State has also manipulated the market in other more destructive ways. In an effort to boost stock prices, it has ended a bonanza in initial public offerings (IPO). With fewer exit opportunities for private investors, the state capital has become more dominant. The danger is that these distortions will limit the growth of China’s most innovative companies.
During the last decade, Xi has ensured that the financial markets They are guided as much by government policy as by price signals and animal spirits. It has redirected capital from once prosperous sectors, such as consumer internet services and the financial technologytowards favored industries such as chip manufacturingthe artificial intelligence and the high-end manufacturing. Thousands of state funds have invested in these areas, becoming a major force in the venture capital (VC) and the Chinese private equity.
For a time, Public markets prospered under Xi. In 2019 it established a specific market for technology stocks, called star. Two years later he inaugurated a new stock exchange in Beijing for small businesses. To keep capital flowing, regulators made it easier for companies to list. In 2022, China hosted the IPO market most popular in the world, with companies raising 587 billion yuan ($81 billion) over the course of the year.
But all this has now stopped. China’s stock markets began to fall in the second half of 2023 and then plummeted in early 2024 (see chart). That led to regulators to begin emphasizing the importance of an “investor-friendly” market. In practice, this has meant allowing far fewer IPO, hoping that liquidity will support the prices of existing shares rather than new ones. Only five Chinese companies were listed on domestic exchanges in April, down from 35 in April 2023. The IPO market raised 80% less capital in the first four months of 2024 than in the same period a year earlier.
Companies that do list face intense scrutiny. In addition to on-site inspections, regulators are now reviewing companies’ past business deals and tracking executives’ bank accounts, according to the news agency. Reuters. Given this, at least 80 companies withdrew their exit requests to the stock market in the first quarter of 2024.
Meanwhile, funds backed by the State, which once aimed to bridge the invisible hand and government policy, now dominate the markets. A state investment manager says private capital has retreated as exit options have faded, while state capital continues to flow. These investors remain sensitive to losses But, without private backers demanding quick returns, they may wait longer to get their money back. “If venture capital funds want to survive, they have to find a way to get money from local governments“, he concluded Robert Wua Chinese investor, in a recent blog post.
Another problem – although Xi could consider it a success – is a greater focus on the industries selected by the State. Restrictions on IPOs have led many to believe that only companies that promote government policies will be allowed to list on the stock market. And so, investors are focusing on favored areas such as flying taxisthe industries near the space and the interfaces brain-machinecalled “new productive forces” by Xiwho hopes these industries will drive economic growth.
The effect on the innovation critical points of China It has been deep. A recent classification of PitchBooka financial database, found that Hefei, a city in China’s dusty interior, has been home to the world’s fastest-growing startup ecosystem for the past six years. Industries ranging from biotechnology until the semiconductors and the artificial intelligence have arisen in this unlikely place, hundreds of kilometers from established centers such as Shanghai and Hangzhou. But on one front, Hefei takes last place: the number of times investors have successfully sold their holdings. Venture capital firms made 735 investments in companies there between 2017 and 2023, but only 23 exits.
It’s not just Hefei. Of the ten cities at the end of the exit ranking of PitchBook, eight were Chinese. As China’s economic growth slows and IPOs become increasingly difficult, the valuations of companies in these places look particularly vulnerable, as do their financing prospects. Xi is trying to inspire companies most innovative in the world and, at the same time, keep private investors and average punters happy. But in the end someone must lose.
The chain effects extend throughout the entire the capital allocation chain. Now that IPOs are more difficult, investors in unlisted companies have fewer exit options. Consequently, the value of investors’ sales of Chinese private equity plummeted from $89 billion in 2022 to just $46 billion in 2023. The resulting drop in valuations has made fundraising more difficult and investors more cautious in deploying their capital.
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