The STAR Market Aims To Reduce China's Dependence on American Technology and Investment

The technological trade war between the United States and China is having ripple effects in the chip market that may change the way the industry finances development at home and abroad. In China, there’s a movement afoot to jumpstart the country’s semiconductor industry by encouraging companies to go public on Shanghai’s relatively new STAR market, the Chinese equivalent of the NASDAQ.  According to the Nikkei Asian Review, at least three chip companies have accelerated their plans to list on STAR within the next year.

The state-sponsored encouragement is intended to give early-stage angel investors an opportunity to reap the benefits of those investments earlier, which China hopes will encourage them to subsequently reinvest their profits in the country’s growing tech sector.  The Chinese banking system is awash in debt, leading the government to find ways to buoy outside investment. The STAR market, which opened in July of 2019, will also provide investment opportunities for private Chinese citizens who are heavily restricted by government restrictions from investing overseas.  

"The creation of the new tech board [or STAR market] is really a new round of policymakers’ move to help local chip companies have easier access to capital," explains Roger Sheng, a semiconductor analyst at Gartner. "Smaller companies will be able to IPO sooner than they used to be able to."

China is seeking to reduce its dependence on foreign technology and embolden suppliers from outside the U.S. to help major Chinese companies such as telecom giant Huawei, the company at the forefront of the simmering (if not quite boiling) tensions between the East and West. China’s economic instability (bad loans increased by 10% in the first half of 2109) coupled with the recent spate of inflated tech stock valuations have made securing foreign investment difficult for entrepreneurial endeavors in China -- fundraising by unlisted Chinese companies dropped by almost 50% in Q1 2019 from the previous year.

"The Washington-Beijing battle is a key reason these chip companies want to turn to capital markets at home,” according to Arisa Liu, an analyst at the Taiwan Institute of Economic Research. “The supply chain is decoupling while the capital market is decoupling too."

While the plan is still in early stages, it seems to be working. Semiconductor Manufacturing International Co., the leading contract chip maker in China, removed itself from the NYSE in May in anticipation of listing itself on STAR in the near future.  Horizon Robotics, an AI-chip manufacturer that specializes in autonomous vehicle systems, also plans on listing on STAR at some point in 2020.  Horizon is an excellent test case for China’s new strategy – despite not yet turning a profit, the company has secured capital investments from sources both inside and outside the country, including semiconductor behemoths Intel and SK Hynix, and is partnering with Audi and a number of Chinese car manufacturers to develop self-driving vehicles.  UNISOC Communications, the second-largest mobile chip developer in China, has also expressed an intent to apply for an IPO on the STAR next year.  

The STAR market is less encumbered by government restrictions than its more established counterparts in Shanghai and Shenzen. Companies that are planning IPOs on the main Chinese markets are required to exceed profits of 50 million yuan before the go public – no such standard is enforced on the STAR.    Six chip manufacturers are currently listed on STAR, and all six have more than doubled the price of their stock since their initial listings.  Anji Microelectronics Technology, a provider of chemicals used in chip manufacturing, opened at 39.19 and saw its stock price soar to 197 yuan – in a single day. (The company’s stock was trading at 151 yuan as of last week.)  

The less restrictive atmosphere could mean quicker returns for investors, but it also comes with added risk. The volatility of the market has some analysts worried that it may be a bubble just waiting to burst. Still, with greater risk come greater returns. Investors looking to make a killing quickly will likely find more opportunities on the STAR than in China’s established stock markets, opportunities that China is counting on to promote investment. Seen in a certain way, the STAR market has the potential to become the Gold Rush of tech investment, with entrepreneurs looking to the East rather than the West to seek their fortunes.  If China’s long-term internal investment strategy pays off, the growing chasm between the American and Chinese tech sectors could get even wider. 

The position of the American government is that Chinese companies are appropriating intellectual property without the consent of their American counterparts and without providing proper compensation. China’s promotion of internal investment could be the catalyst towards the country becoming an intellectual property provider themselves. The propagation of open source hardware (like RISC-V) and software (such as Linux) could further push Chinese companies towards reducing their reliance on American technology. As the Chinese chip industry encounters unfamiliar terrain, we’ll be watching to find out whether these developments signal a true sea change or just a few ripples on surface of a pond.