Promoted as China’s version of NASDAQ, the ChiNext Market aims to provide investor access to new and fast-growing Chinese tech enterprises. So how is it doing so far?
The ChiNext Market, a subsidiary of the Shenzhen Stock Exchange (SZSE), is approaching its 13th birthday. Designed to help “galvanise growth in emerging industries of strategic importance”, this high-tech board was originally proposed by the Chinese government back in 1999 but only launched 10 years later, on 23 October 20091.
Given the strides made by Chinese tech companies in recent years, here are five key ChiNext highlights:
# 1: ChiNext’s recent reforms get the thumbs up from tech startups
In its first decade of operation, the ChiNext Market made good enough gains, growing from 113 company listings in 2010 to 849 by August 2020, a CAGR of 22%.
Figure 1: ChiNext Market: Number of company listings and market cap, 2010 - 2022
However, this pace has accelerated significantly over the past two years since the introduction of a registration-based IPO system in August 2020. The reforms, involving enhanced information disclosure, improved audit processes and market pricing of new share sales, have been welcomed by tech startups as enabling more financial opportunity. In the past two years alone, 331 new companies have successfully listed, bringing the total to 1180 as of August 2022.
# 2: ChiNext accounts for a big share of China’s (and the world’s) IPOs
ChiNext is one of the world’s biggest IPO markets. Together with the similarly technology-heavy STAR market (registered on the Shanghai Stock Exchange), these two bourses now account for the vast majority of China’s IPO financing. According to the Securities Association of China, the two markets accounted for three quarters of the country’s total IPOs in 2021. For the ChiNext, 199 IPOs managed to raise 149.4 billion yuan (approx. US$23.1), accounting for 25 percent of the total raised by IPOs during the year.
In the first nine months of 2022, ChiNext again came in as the second largest IPO market globally, ranking behind STAR but ahead of Hong Kong2. ChiNext’s IPOs so far this year have reached 177 and raised a total of US$20.54 billion, according to Refinitive data.
# 3: ChiNext is home to a large number of strategic companies
The ChiNext Market has over 100 specialised sectors with many of the companies coming from so-called “strategic emerging” industries such as next-generation infotech, biopharmaceuticals, advanced industrials, high-end manufacturing and new economy sectors. These breakdown into subsectors, which include the following innovation subsectors:
Figure 2: ChiNext Market sectors and subsectors
|Advanced Industrials||Ion-lithium EV battery manufacturing, renewable energy equipment manufacturing|
|Healthcare Technologies||Life support systems, ultrasound machines, Covid-19 vaccine production|
|Information Technologies||Smart device operating systems, cloud computing, cybersecurity|
|Financial Technologies||Internet financial services, third-party payment services|
|New Materials||Research, development and production of new energy materials, rare earth magnetic materials|
# 4: ChiNext companies show good profitability
As at August 2021 (i.e. the first anniversary of the reformed ChiNext Market), over 80 percent of ChiNext’s 1,014 listed companies made a profit and 70 percent saw their earnings grow, despite Covid challenges3.
A SZSE report has found that on average, net profits of ChiNext-listed companies increased by over a third year-on-year in August 2021. Of these, 395 companies achieved a net profit growth of more than 50 percent, while 55 companies made profits of more than 500 million yuan (approx. US$ 77 million).
It is notable that among the 16 largest companies i.e. those with a market cap of 100 billion yuan, nine companies saw their net profits increase by more than 100 percent. This suggests that reaching a critical size can help boost high-tech company profitability.
#5: The ChiNext Index has a low correlation to global indices
The ChiNext Index is the benchmark and flagship index of the ChiNext Market. It comprises 100 of the largest and most liquid A-shares listed on the ChiNext Market. The index has a higher allocation to new-age industrials, healthcare and information technology sectors than other China indices.
Figure 3: ChiNext Index’s Top 3 sector allocations versus other China indices
|ChiNext Index||MSCI China Index||MSCI China Index||MSCI China Index|
Source: CNI Index for ChiNext Index; MSCI for MSCI China Index, MSCI China A Index and MSCI China All Shares Index, 31 Aug 2022.
This high exposure to new technologies and China focuses means that the ChiNext Index tends not to move in the same direction as major country, regional and global equity indices. This low correlation (as shown by the correlation coefficient numbers below) allows investors to achieve a good level of diversification by including the index into existing portfolios. Exposure to the index is possible by investing in an exchange-traded fund (ETF) or actively managed fund that uses the ChiNext Index as its benchmark.
Figure 4: Correlation between ChiNext Index and other asset classes
|Asset Class (Index)||Correlation Coefficient|
|China equities (FTSE China A50 Index)||0.596|
|Global equities (MSCI ACWI Index)||0.326|
|US equities (S&P 500 Index)||0.291|
|Singapore equities (Straits Times Index)||0.259|
|Global bonds (Bloomberg Global Aggregate Index)||0.162|
|Global commodities (Bloomberg Commodity Total Return Index)||0.107|
Source: UOBAM, Bloomberg, as at 31 May 2022, based on the weekly data from the past 5 years
Note: A correlation coefficient of 1 denotes a perfect positive correlation. This implies that as one security moves, the other security moves in lockstep and in the same direction. A correlation coefficient of zero implies that there is no linear relationship between the two securities. Therefore, the lower the number, the lower the correlation.
The ChiNext Index has fallen by 31.1 percent year-to-date4 along with other growth indices but is expected to recover once the threat of a global recession recedes. It has positive 3-year and 5-year annualised returns of 12.04 percent and 4.16 percent respectively.
The ChiNext Market was created as a source of private capital financing for China’s up-and-coming tech companies. In turn, the high volume of tech-based IPOs in China over the past few years has seen the market expand and strengthen.
1Shenzhen Stock Exchange, ChiNext, August 2022
2South China Morning Post, ‘Hong Kong fourth among biggest IPO markets globally, as Shanghai’s Star Market takes top spot and Singapore fails to make the cut’, Sep 2022
3Shen Zhen Stock Exchange, ‘ChiNext Board of SZSE Continues Rapid Growth in H1 2021’, Sep 2021
4CNI Index, ChiNext Index Performance, October 2022
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