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China’s Star market has outperformed nearly every global exchange—but will it last?

July 23, 2020, 11:26 AM UTC

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The Star Market, China’s stock exchange for home-grown technology firms, marked its first birthday this week. As The Economist observes, the fledgling bourse has much to celebrate.

Star was launched by the Shanghai Stock Exchange on July 22, 2019 with firm backing from Chinese President Xi Jinping, who touted it as a rival to Nasdaq. Star debuted with 25 companies, registered record gains in its first day of trading, and is now home to 140 companies worth $400 billion in combined market value. The South China Morning Post reckons that since launch, Star has minted at least 13 yuan billionaires.

In the first half of this year, Star has raised $7 billion for companies in initial public offerings, outperforming the 30-year-old Shanghai main board; ChiNext, the tech-focused exchange launched in Shenzhen a decade ago; and, indeed, every other global exchange except Nasdaq.

And Star seems poised to widen that lead. On Monday, Ant Group, the fintech arm of Chinese e-commerce giant Alibaba Group Holding, confirmed plans for a dual listing on Star and the Hong Kong exchange. Ant was last valued at $150 billion in a private fundraising round in 2018, and several holders of the venture’s shares have since marked up the value of their investments. Ant hasn’t specified the timing or size of its IPO, but the offering could be the biggest IPO ever, eclipsing Saudi Aramco’s $26 billion debut last year.

Scores of other Chinese companies, many of them already listed in New York or Hong Kong, have expressed interest in initial or secondary listings via Star.

The Economist discerns two reasons for Star’s popularity among issuers. One is solid political support from Xi, who is seeking to direct capital to cutting-edge technologies—including semiconductors, high-tech sensors, and quantum computing—he deems crucial to the future development of China’s economy. To give listings on Star a boost, Beijing has loosened many restrictions that hobble the other Chinese exchanges—including an informal price cap of 23 times earnings and the 44% limit on first-day gains. Earlier this month, QuantumCTek, an information security firm, soared a record 924% in their first day of trading on Star.

A second factor is mounting tension between Washington and Beijing. The Trump administration vows sanctions against Chinese leaders, while U.S. lawmakers have passed legislation that would force U.S.-listed Chinese companies off American exchanges if they fail to match disclosure standards applied to U.S. firms.

Still, Star’s long-run prospects remain unclear. Fraser Howie, a veteran China markets watcher and author of Red Capital: The Fragile Financial Foundations of China’s Extraordinary Rise, notes that Star may prove vulnerable to problems that have bedeviled other mainland exchanges since the Shanghai exchange re-opened in 1990s as part of Deng Xiaoping’s economic reforms. Among those failings: lax disclosure rules, high volatility, a casino-like culture dominated by speculative retail investors, and a reluctance of regulators to delist underperforming firms.

In an essay this week in Japan’s Asian Financial Review Howie warns: “This looks all too similar to the China IPO patterns we have seen for decades, where trillions of yuan have chased new listings regardless of underlying corporate performance.”

Speaking of market reforms, former Morgan Stanley Asia chairman Stephen Roach argues in this week’s Eastworld Spotlight conversation that if Beijing were to press ahead with an agenda of restructuring uncompetitive state-owned enterprises, rolling back capital controls, and expanding the social safety net, the renminbi has a shot at supplanting the U.S. dollar as a global reserve currency. But he doesn’t think that will happen. His guess is that, in the wake of the coronavirus outbreak, China’s leaders are focused on short-term recovery rather than long-term reforms. Roach, who served as Morgan Stanley’s chief economist and now lectures at Yale University, warns that the dollar could be headed for a staggering 35% decline. He tips the euro as the world’s most undervalued major currency— and most likely alternative to the buck.

More Eastworld news below!

Clay Chandler
clay.chandler@fortune.com

This edition of Eastworld was curated and produced by Grady McGregor. Reach him at grady.mcgregor@fortune.com

Eastworld news

A Houston problem

The U.S. government ordered China to close its consulate in Houston this week, a move that prompted Chinese officials to burn documents in the consulate’s courtyard before the Friday deadline to vacate the embassy. In explaining the closure, the U.S. State Department accused Chinese diplomats of stealing trade secrets and American scientific research, in addition to falsifying the documents of Chinese military officials in the U.S. China has refuted the allegations and vowed retaliation, which may include ordering the closure of U.S. consulates in China. Chinese state media sources have also argued that the U.S. made the move only to bolster U.S. President Donald Trump’s re-election chances. At this low point in U.S.-China relations, U.S. Secretary of State Mike Pompeo is set to give a policy speech on China on Thursday entitled “Communist China and the future of the free world.” New York Times

Alibaba’s India bet

Deteriorating Sino-Indian relations and a resultant backlash against Chinese technology firms in India may jeopardize Alibaba’s big bet in India. Since 2015, Alibaba has invested over $1 billion into India’s most valuable unicorn Paytm, a payments company valued at roughly $16 billion. Alibaba is the largest shareholder in Paytm with a nearly 40% stake, and its funding and training programs for the company have been essential to Paytm’s growth; it serves over 400 million users. However, India's government has proposed new regulations that would effectively block Chinese firms like Alibaba from major tech investments, even as American competition in India—from Google, Amazon, and Facebook—heats up. The Wire China

A tightrope in Hong Kong

A group of wealth managers in Hong Kong, including HSBC, UBS, and Credit Suisse, are evaluating whether their clients have ties to the city’s pro-democracy movement after Beijing imposed the national security law in the city, according to Reuters. These checks may make it more difficult for those with anti-government histories in Hong Kong to access banking services; in worst-case scenarios they may lose access altogether. Meanwhile, potential U.S. sanctions against individuals who enact Hong Kong's national security law are causing banks to similarly assess the accounts of mainland Chinese and Hong Kong officials. On the mainland, companies are also coming under increasing political pressure. In a speech to Chinese and foreign business executives on Wednesday, Chinese President Xi Jinping called on all companies operating in China to be more patriotic. Reuters

A dimming torch

The 2020 Tokyo Olympics were supposed to kick-off this week. Instead, the pandemic has forced Japan and the International Olympic Committee to postpone the games until the summer of 2021 in what may be a scaled-down affair in comparison to the original 2020 plans. The Japanese government invested over $12 billion to build new stadiums, trains, and other projects as it prepared to play host. That spending may unnecessary if fewer fans are allowed to attend the games. Faced with declining revenues and uncertainty about the potential for a vaccine, the event’s corporate sponsors may also be forced to pull out. Nikkei Asian Review

Coronavirus by country

Kazakhstan

Central Asia weathered the first few months of the pandemic with relatively low case numbers, but COVID-19 infections across the region have spiked in recent weeks and no country is getting hit worse than Kazakhstan. It has thus far recorded over 600 deaths and 76,000 cases—50,000 of which have come since the beginning of July. The jump has prompted the Kazakh government to reimpose lockdown measures that were first introduced in March and lifted in May. The situation has also sparked a strange war of words between Kazakhstan and China, neighboring countries that have long shared friendly relations. In early July, the Chinese embassy in Kazakhstan reported that an “unknown pneumonia” that was far deadlier than COVID-19 was killing scores of people in the country. Kazakh authorities refuted the report as not “corresponding with reality.” Analysts believe that the “unknown pneumonia” may have been undiagnosed cases of COVID-19, a sign that Kazakhstan's pandemic is far worse than official figures indicate. The Diplomat  

Markets and movers

Ant Group – Alibaba’s financial technology subsidiary announced this week that it will seek a dual listing in Shanghai and Hong Kong by the end of the year. It's expected to be a blockbuster listing for the world's most valuable unicorn. Fortune

DiDi Chuxing – The Chinese ride-hailing giant announced on Wednesday that it is opening a new standalone ride-hailing service called Huaxiaozhu, which is targeted at younger consumers and will offer cheaper rides in comparison to its main platform. Deal Street Asia

Starbucks – With Luckin, Starbucks’ main challenger in China in shambles, the American coffeehouse chain announced on Tuesday a new partnership with Chinese tech giant Alibaba to place Starbucks’ offerings on more of the company’s digital platforms. CNBC

Flipkart – The Indian e-commerce company announced on Thursday that it will take a 100% stake in Walmart India's wholesale business and launch a new product called Flipkart Wholesale, a new digital marketplace. Walmart has had a controlling stake in Flipkart since 2016, and both companies said on Thursday that the move will further integrate their operations. Livemint

Morgan Stanley – The U.S. bank is blocking interns in China from remotely accessing the company’s private networks due to concerns about China’s strict cyber security rules and the network potentially being compromised. For now, Morgan Stanley is an outlier among American banks in China; other firms like Goldman Sachs and JPMorgan Chase are continuing to offer digital, remote internships in the country. Financial Times

Final figure

-3.3%

South Korea avoided large-scale lockdowns amid the pandemic, but its economy has plunged into recession anyway. On Thursday, the Bank of Korea announced that the country’s GDP fell 3.3% compared to the first quarter and was down 2.9% versus Q2 of 2019. The downturn is due to a significant drop in exports, which normally account for 40% of the country’s annual GDP; they were down 16% in June 2020 compared to 2019. Still, private consumption was up 1.4% in the second quarter, and South Korean officials are hoping that increased global demand in the latter half of 2020 will help pull the country out of its current recession. Fortune