This is a preview of Periscope—a weekly report by KrASIA, delving into China’s industries and markets. We discuss a different space each week and include highlights of relevant top stories. If you would like to read the report in full and gain access to our library, please click here.
In our previous entry, we covered how China strives to prevent involution by piloting new “registration-based” reforms for its domestic A-share capital markets. We mentioned half of the top ten trends that are likely to materialize in 2021. This week, we unpack the remaining predictions.
Prediction 6: The elimination of a valuation gap between primary and secondary markets
When only a limited number of shares are available for trading, retail investors are often willing to pay a higher price for the stock, resulting in share prices skyrocketing when IPOs take place. This “scarcity premium” that is commonly seen in China capital markets may end as reforms unfold, because companies will have easier access to public financing.
In 2021, trading will likely be tempered. Only companies with solid fundamentals will be able to attain higher value on public markets. Those that lack core competency or rely on overvalued private financing may fall short on the first day of listing. At the end of November 2020, 67.86% of the companies on Star Market and 79.59% on ChiNext board saw share prices floating below their first trading day’s close.
Prediction 7: Markets to be dominated by institutions, squeezing out retail tranche
Over the past 30 years, retail investors have been extremely active in China’s capital markets. Although small-scale traders contribute to the liquidity of a bourse, their inexperience and relative irrationality mean they cannot be the bulwark of a mature market.
In 2020, the number of institutional investors, such as mutual funds, has increased in China. As these funds concentrate their investments on leading players in each vertical, there is now greater differentiation within listed companies’ market capitalization. Retail investors who lack professional expertise are in turn less likely to sway the market. This cultivates a more rational culture of value investment in China’s stock markets. Retail investors are better off investing in a mutual fund that suits their needs than buying and trading individual stocks.
If you would like to continue reading about prediction 8 – 10 for CHina’s Capital Market’s this year, click here.