Casino Trading: China's Nasdaq-style Exchange Opens

Posted by: Frederik Balfour on October 30, 2009

China’s newest roller coaster opened today in Shenzhen. It’s called ChiNext, and is the country’s answer to Nasdaq. The long awaited bourse has been nearly 10 years in the birthing, and retail investors have been chomping at the bit for a new venue to engage in “chao gu”, meaning stir fry, the local equivalent of flipping stocks. These guys make day traders in the U.S. look conservative by comparison.

ChiNext certainly serves up the kind of fare that caters to the tastes of chao gu traders. Take Huayi Brothers, a Beijing-based film production company which has worked with box office stars including Jackie Chan, Jet Li and Zhang Ziyi. Within minutes of the opening bell its shares soared 129% from its IPO price and by midday were up the close was up 210% to yield a price-earnings multiple of 151. By comparison, the average price earnings ratio based on estimated 2009 earnings for companies on the Shanghai Stock Exchange is about 21. Another company, Beijing Toread Outdoor Products, which makes and retails camping accessories and clothing, surged 152.5%, Bloomberg reported. Medical device maker Lepu Medical Technology, the largest company on the bourse, leapt 182% by 1:00 p.m. giving the company a valuation of $4.3 billion.

Today’s price moves might have been even bigger were it not for the existence of circuit breakers. In fact, all 28 companies’ shares were suspended at one point. The first trigger point on ChiNext occurs if prices have moved up 20%—leading to a 30 minute pause in trading. The next 30 minute halt takes effect after a 50% move, and if the difference between the high and low of the day exceeds 80%, the stock is only allowed to trade in the final three minutes before the closing bell. [The trading band is based on the first trade of the day, not the IPO price.] Compared to the Shanghai Stock Exchange, which has had a 10% daily price change limit, ChiNext offers greater thrills to investors in search of a white-knuckle ride. [Nasdaq’s first trigger point occurs at 10%, then 20%, and trading is suspended for the entire day if price swings reach 30%.]

UPDATE: There was a severe reversal of fortunes on the second day of trading, Monday Nov. 2. According to Bloomberg, 20 of the 28 stocks traded down the daily limit of 10% as investors took as much money from their first day gains off the table as they could.

But we will have to wait and see whether the frenetic pace of trading set on the first day is sustainable. Volumes in any market typically soar on the initial day of trading following an IPO and today’s launch of ChiNext amounts 28 simultaneous trading debuts. And nearly all the activity is from small retail investors. Because of the relatively small size of the market- before the first day of trading, the combined market capitalization was just $10.2 billion [Shanghai’s market capitalization is about $2.48 trillion], and though this more than doubled on the first day, all but a handful of institutional investors are likely to participate. What’s more, many funds raised their cash long before the new bourse opened, and do not have a mandate to invest in it. The 28 companies on the growth-enterprise board raised a total of $2.27 billion in their IPOs.

But at these price levels, even funds which can invest in ChiNext are unlikely to do so. Simon Murray (China) launched its $250 million SMC China New Market Fund on October 1, in part to invest on the new bourse. However its Shanghai-based chief investment officer Tony Yam says he rather wait on the sidelines until the froth comes off the market. “Some of these companies look interesting and have been purposely selected by the regulators as good quality or new sector companies,” he told me the night before the market opened. “But we are fundamentals driven and we have set entry level prices…but right now they are not trading at cheap valuations.” Considering how much prices moved up on the first day, Yam will be watching from the wings for some time to come.

While ChiNext is bound to leave lots of carcasses of unwary investors by the wayside when the inevitable correction comes along, the new exchange is a welcome development in China’s long march to liberalize its financial sector. “It’s very positive because China needs to create a good system to help high quality but good companies to reach capital to fund growth other than the main boards consisting of larger listed companies,” says Tian Rencan,CEO of Fortis Haitong Investment Management.

Private enterprises face enormous obstacles in raising capital, as banks tend to regard state-linked enterprises as less risky borrowers. The Shanghai Stock Exchange is still predominantly made up of state-controlled companies which depend on connections as much as economic fundamentals to get permission to list their shares in a process that is far from transparent. Whether ChiNext will be any less opaque remains to be seen.

Reader Comments

ChiRich!

October 30, 2009 8:04 AM

Looks like a better gamble than Macao!

Sierra

October 30, 2009 11:53 AM

How Do Americans like the backfires of Cowboy & Casino Capitalist Criminalism? Jobless recovery?

jim

October 30, 2009 3:42 PM

Investing by definition has its own uncertainty and volatility. Nasdaq:mainstream::ChiNext:casino trading. This is double standard in the extreme. If you don't like 'capitalistic' China, do you want to drive them back to 'real Communism'??

Howard

October 31, 2009 2:44 AM

Nasdaq and ChiNext is of the same feather that both return and risk of investment is high.
All the companies listed in ChiNext are private enterprises who face enormous obstacles in raising capital from state-controlled banks. So ChiNext is a good start for these SME to access financing.

WilliamT

October 31, 2009 3:29 AM

Better keep this ChiNext thing low profile......or else there will be a horde of unemployed Americans and Europeans trying to migrate to China to join the hundreds and thousands of foreign expatriates working there now.

Let me give you readers a word of advice

October 31, 2009 8:52 AM

Always bet on RED!

Maersk

October 31, 2009 2:48 PM

There is a saying that goes like this: "A dog's mouth grows no ivory." Such a saying is absolutely appropriate to describe those kwok zucking reporters like Frederik Balfour.

Gang

October 31, 2009 6:09 PM

Maersk,

If you are not Chinese, I do admire your knowledge (due to your lovely quote :))

Fairly speaking, Chinese do love gamble. Gambling isn't a bad thing if the game is fair: no government bailouts, no lobbyists, no media propaganda, etc.

ChiNext indeed give Chinese entrepreneurs another vehicle to raise money. I've already seen another wave of Chinese entrepreneurs.

Gang

jcage

October 31, 2009 7:21 PM

If one keep following BusinessWeek report on China, then one can notice a negative bias reporting in China. Reporting bad news on China is not the issue but emphasizing the China bad news at the expense of the Chinese good news, in other word, is the lack of semblance of balance and objectiveness when it come to reporting on Chinese economic. One should wonder why BusinessWeek got sold for something less than 5 millions dollar to Bloomberg and BusinessWeek has 80 years of history so this is a reflection in the quality of BusinessWeek. Bloomberg first order of the day after acquiring BusinessWeek would be to replace most of the existing writers and that would be easy to do by just reviewing all the respective work done by each of the BusinessWeek Asian section writers like Frederic Balfour, Bruce Einhorn, Peter Engardio, and of course Dexter Robert!
Bloomberg manager need to get rid most of the low quality writers or else it would damage Bloomberg image!

critic

November 1, 2009 1:17 AM

Apparently Businessweek is not only a badly run American business, but apparently doesn't meet Chinese media quality standards either!

I hope Bloomberg can salvage what remains of BW's international reputation.

itqdca

November 1, 2009 1:46 AM

RATIONAL...Rational..and rational...This is the most fundamental thing in the investment. Without it, what is up irrationally, will come down hard. We, as traders always love to speculate up(that's part of trading psychology), and lose the rational thinking.

downhill

November 1, 2009 1:55 AM

Which points in this article are people upset about? Would appreciate if people share factual, businesslike information that we can use in our business and investment decision making, to "balance" the article's perceived "imbalance." Won't you like the rest of us to come to the conclusions ourselves? It's hard to share your views when the views you share are conclusory opinions of the writer and his colleagues. It's even harder when they are personal attacks. The high road is where people should travel on, so let's get back up there.

sophgold

November 1, 2009 3:17 AM

It seems like “五毛”or "fifty cents" are swarming here,too.haha."中国特色“, you westerners need not be surprised.They are all get pay from the Chinese Communist government for their unique job.They defend China(more precisely, Chinese Communist Party)against any negative news or reports about it, no matter ture or false.
As a Chinese , I feel terribe shame about it,but the "grand" ,"glorious", "almighty" Chinese Communist Party have fabricated it, we can do nothing except tell you westerners: these bastards are thoroughly liers.

@Downhill

November 1, 2009 9:35 AM

Since when has China ever taken the high road? The government attacks anyone who dares to challenge them. Consider what they do to their own dissidents through life imprisonment, public shaming, or execution.

But not to worry. I'm sure that Obama will take the high road during his China visit this month.

tigger

November 1, 2009 1:48 PM

Not sure how many of the comments were posted by "wu mao party". For those of you who have not heard of the name before, Chinese government is paying people to post pro-government comments online for 50 cents per post, which is "wu mao" in Chinese. In China we call this people "wu mao party".

jcage

November 1, 2009 8:32 PM

I guess that everyone that does not agree with the China-bashers are paid up shills or at worse brain washed by the CCP or we can say that all the China-basher are paid up by the CIA. That is an easy way to win an argument by attacking the critics. Is not BW for sales for something less than $5 million? If BW is doing well, it would not be sold to Bloomberg.
Here is some exert from Bruce Einhorn in which he would use a natural disaster and then associate with the Tianmen Square.
http://www.businessweek.com/globalbiz/content/jan2008/gb20080130_195483.htm

Here is more from Bruce Einhorn
http://www.businessweek.com/globalbiz/blog/eyeonasia/archives/2008/02/chinas_crisis.html

Also, there a lot of China vs India or India vs China article in BusinessWeek. BusinessWeek like to pit China vs INdia, BW is a race baiting magazine from the articles that they wrote on China vs India to inflame hatred beteen both countries. Bloomberg need to clean up the BusinessWeek Asian section like removing all the dead wood and fake economist!

downhill

November 2, 2009 12:09 AM

Thanks Jcage. This is more useful. As for "a lot of China vs India or India vs China article", could you post a list of all of them?

author

November 2, 2009 4:16 AM

UPDATE: There was a severe reversal of fortunes on the second day of trading, Monday Nov. 2. According to Bloomberg, 20 of the 28 stocks traded down the daily limit of 10% as investors took as much money from their first day gains off the table as they could.

downhill

November 2, 2009 7:26 AM

Natural outcome. People might look at my posts under Ed Wallace's Oct.20 article "How Wall Street Will Kill the Recovery" about sheep. Jcage might have some valid points regarding other BW articles. But for this one, I have yet to see any ostensible flaws. What it points out are what investors ought to know, and most wise ones already do, and the wily ones profit from. Media writers do not have to be cheerleaders. Those who did for the internet bubble or the housing bubble did great disservice to their readers, like I pointed out in those posts, sometime for unspeakable, self-profiting motives. This article does the opposite.

downhill

November 2, 2009 7:34 AM

For those who fan the bubble with an aim to profit from the herds of sheep falling off the cliff, the media writer is someone to be bribed if possible, to be put on skewer if not compliant. Is it more profitable for him to be compliant? Or to be put on skewer? This article took the latter.

sophgold

November 2, 2009 7:53 AM

jcage,you damned lier,shame on you! I have read all the pages you posted above,but find nothing so you called "inflame hatred between both countries(india and china).You are just a "fifty cents"(wu mao).I can easily distinguish you from common commentors by your practice in the debate. You "fifty cents" are all the same.

sophgold

November 2, 2009 8:37 AM

I would like to explain how the phrase "wu mao" was forged.
Several years ago, it is said that there are more than 200,000 men and women are hired by the CCP government as "Internet Commentor" or "fifty cents". Today,the number may be much larger. They swarm on most of the Chinese BBS's or other Internet community,devote themselves to not only defending the CCP against any negative news or comments, but also posting comments under the direct instructions of a special affiliated establishment of CCP's “Department of Propaganda". Originally,they are paid "fifty cents" or ”wu mao" in Chinese for each post. So, they were called “wu mao" which implied some kind of abhorrence by Chinese people.Of course ,their wage must be much higher now. ”五毛" or "wu mao" is one of the most widely known "Internet phrase” in China.

@ Sophgold

November 2, 2009 9:39 AM

This is the classic case of someone who lost an argument who resort to personal attack.

@ Sophgold

November 2, 2009 9:40 AM

You are a classic case of someone who lost an argument and resort to personal attack.

Shunjing

November 2, 2009 11:01 AM

Where can I Claim the 50 cents. Does overseas Chinese qualify? By now I can claim a few thousand dollars.

jim

November 2, 2009 11:38 AM

I also want to sign up (for the 50 cents)!
What Fred lacked is a genuine desire to become a good journalist. A journalist by definition is to report, based on numerous independent verifiable sources without injecting his/her personal opinions. The conclusions should be left to the readers. To place your own conclusions on the topic only indicates your own bias. Jcage is absolutely correct. The BW Asian Section needs reform. We do not need 'copy and paste' reporters stationed in little cubicles. Objective and first hand info. is greatly desired.

jcage

November 2, 2009 7:06 PM

To Jim
"We do not need 'copy and paste' reporters stationed in little cubicles."

There have been several articles in the BusinessWeek Asian section in which the titles and the body of the report did not match at all! It was pure copy and paste operation!
It was pretty much obvious that the editor was sleeping on the wheel!

The BW Asian Section needs reform

November 2, 2009 8:21 PM

But not the CCP... ;)

downhill

November 10, 2009 12:39 AM

Has anyone pointed clear fallacies in this article? BTW, total market cap has drop 30% from the peak of the first day of trading. Some list company fell >45%. Some estimates put the trading volume on the first day at >95% from retail investors. Some major sheep slaughtering there.

C. H. Ng

November 10, 2009 3:34 AM

I am an oversea Chinese & I am definitely not belonging to a "wu mao party" nor I will be so hardup to be paid just 50 cents to post my comment.

I guess in every country there are bound to be people who are either pro- or con-government. In China it is also the same. I am not trying to say all the good things about China but one thing I got to point out to those who are like to talk bad about their government, is that to rule a big country with such a huge population is never an easy task. Of course you can still argue about your point of views & that the grass over the neighbouring country or countries are much more greener. If that is the case, I would like to show you a comparison about a certain country which unfortunately I cannot name here openly lest I will be dragged away & thrown in jail anytime by the police.

In this country, it's supposed to be democratic but many politicians are nominated by ways of money which are often illegally obtained or by using dirty tactics. Policies are biased against the minorities; corruptions are so rampant & openly that those at the top level are so blatant that they are like "untouchable". Nobody can do anything or touch them. In China there are also similiar things but I understand such abuser of power if caught will be shot no matter how high his or her rank is. So in this point, China scores better in trying to stem her level of corruptions.

There are still many other bad examples beside the aboves but I will just stop right here. I only can say this to those who still think of nothing good about your own country & like to think the grass over the other side is always greener, is that I hope you are not jumping from a hot pan into the frying pan. Afterall, nothing in this world is perfect.

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