There's volatile, and there's ChiNext. All 28 debutants on Shenzhen's new board for growth stocks tripped multiple circuit-breakers on Friday, some more than doubling. Yesterday two-thirds of them did so in the other direction, tumbling more than 10 per cent. Beijing-based Huayi Brothers, China's largest film studio, was typical – up 147 per cent, down 11 per cent. If the Shanghai Stock Exchange is a bit of a casino, then the new junior board looks like it will be a back-alley cockfight.
Growth markets often falter: remember Easdaq, or Germany's Neuer Markt? Successful venues can take years to develop a full spectrum of issuers, from main market proxies (low volatility, high volumes, analyst coverage) at one end, to striplings barely out of venture capital at the other. But the omens aren't encouraging for China's new bourse. Growth markets need patient, long-term investors. And ChiNext is as short of those as its seniors in Shanghai and Shenzhen. On CLSA estimates, about a fifth of the capitalisation of the mainland markets is publicly accounted for, held by local and foreign institutions. The remainder is owned by flighty retail investors and shadowy government-linked bodies, whose investment objectives are anyone's guess. Growth markets also need unhysterical valuations. At close, the average trailing price/earnings ratio of ChiNext constituents is 71 – more than double that of the Shanghai benchmark, and more than triple the S&P 500's.
The rationale for ChiNext remains sound. The world's leading capital markets – London, New York, Tokyo – are multi-tiered. China's start-ups have struggled for access to equity capital; the internet companies Baidu and Ctrip, for example, now worth a combined $17bn on Nasdaq, had to look elsewhere. A reliable outlet for growth stocks also draws in more private equity money to back listable candidates. But note the key word, “reliable”. ChiNext is anything but.