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UNCLAS SECTION 01 OF 02 GUANGZHOU 000006 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/LEE 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER 
STATE PASS SAN FRANCISCO FRB FOR CURRAN 
TREASURY FOR LOEVINGER/MOGHTADER/CUSHMAN/VANHEUVELEN 
 
E.O. 12958: N/A 
TAGS: EFIN ECON CH
SUBJECT: China Financial Markets: Shenzhen Start-Up Board Rocking 
and Rolling 
 
Ref: A) 09 Guangzhou 216, B) 08 Guangzhou 214 
 
GUANGZHOU 00000006  001.2 OF 002 
 
 
(U) This document is sensitive but unclassified.  Please protect 
accordingly.  Not for release outside U.S. government channels.  Not 
for internet publication. 
 
¶1. (SBU) Summary and Comment: The long-awaited "NASDAQ-like" 
start-up board, ChiNext, completed its first 2 months of operation 
in positive territory after finally making its Shenzhen debut on 
October 23, 2009.  The new board opened by offering a first batch of 
28 companies followed by another listing of 8 more firms on December 
25, for a total of 36 listings by the end of the year.  High 
volatility characterized the first two months of operations as the 
market remains small.  The question remains whether ChiNext can 
truly emerge as China's NASDAQ market for start-ups and high-tech 
firms, or whether external competition to list Chinese firms 
overseas and domestic regulators' unwillingness to approve new 
applications will cause the new board to wither on the vine.  End 
summary and comment. 
 
ChiNext Finally Makes Its Debut 
------------------------------- 
 
¶2. (U) China officially launched ChiNext, the "NASDAQ-like" start-up 
board on Shenzhen Stock Exchange (SZSE) on October 23, 2009, after 
repeated delays and regulatory hurdles (reftels). The board is aimed 
at funding technology and innovation-driven start-up companies, in 
line with China's plans to shift its economy from traditional 
manufacturing towards innovative, higher-value industries.  Among 
the 28 firms that started trading on ChiNext on October 30, twelve 
are in advanced manufacturing, four are pharmaceuticals companies, 
six are information technology companies and the rest are service 
providers. 
 
Initial Performance Shows High Volatility 
----------------------------------------- 
 
¶3. (U) The first two months of ChiNext showed "W"-shaped performance 
and demonstrated the speculative nature of China's equities markets. 
 On their October 30 debut, all 28 stocks gained at least 76% and 
pushed price-to-earnings (PE) ratios as high as 150.  So 
overwhelming was the rush to buy that regulators temporarily 
suspended share trading for each of the 28 newly listed companies at 
different points throughout the day under special rules created to 
rein in speculative trading on a firm's first day of trading. 
According to those rules, a newly listed stock whose value 
fluctuates more than 20% from its opening price will be suspended 
from trading for a 30-minute cool down period before trading can 
resume. 
 
¶4. (U) The buying frenzy didn't last long.  The second trading day 
saw 20 of the 28 stocks fall by the 10% daily limit established by 
the Shenzhen Stock Exchange and were suspended from trading for one 
day.  Fast forward two weeks and the market value of ChiNext had 
fallen to RMB 127 billion (US$18.6 billion), or RMB 12.9 billion 
(US$1.9 billion) less than its opening day peak, which represented a 
short-lived trough for the new board. 
 
¶5. (U) The market then returned to a more growth-oriented track and 
celebrated its one-month anniversary at a level 3.24% above opening 
day, at RMB 144.5 billion (US$21 billion).  However, critics pointed 
out that ChiNext performance was exceeded by the main boards in both 
Shenzhen and Shanghai, as well as the new board's "brother" - the 
Shenzhen SME board.  The three other mainland boards recorded 
increases over the same one-month period of 6.66%, 9.67% and 7.05%. 
 
 
¶6. (U) On December 3, the market value of Chinext reached a new 
high, exceeding RMB 160 billion (US$23.6 billion), its highest value 
since opening day.  In order to rein in speculative trading 
behavior, the Shenzhen Stock Exchange implemented new measures to 
restrict accounts that showed "serious abnormal trading."  By 
December 22, just days before the board opened trading for 8 newly 
listed companies, the total market value of ChiNext fell back to RMB 
127.5 billion, nearly reaching its previous low. 
 
 
GUANGZHOU 00000006  002.4 OF 002 
 
 
New Firms Listed 
---------------- 
 
¶7. (U) A second batch of 8 companies was officially listed on 
ChiNext on December 25.  However, the first-day performance of the 
new batch was not as noteworthy as the initial opening, with price 
increases averaging less than 50%.  Media commentary attributed the 
less dramatic opening day to regulators' ongoing warnings about 
market risks and irrational PE ratios of ChiNext, which many 
analysts believe led investors to take more caution when subscribing 
to the new stocks.  ChiNext finished 2009 with a total of 36 
companies listed on the board and total market value reaching just 
over RMB 160 billion (USD 23.6 billion). 
 
What's Next - More Listings but How Fast? 
---------------------------------------- 
 
¶8. (SBU) Shenzhen's new board is expected to grow dramatically in 
2010, probably in market value, and certainly in the number of 
listed companies, but the pace of new listings troubles some 
analysts.  Some analysts, including Zhang Yidong of Xingye 
Securities, criticized the slow speed of new listings, pointing out 
that "right now a few wealthy individuals can shift a stock up or 
down by its daily limit, but once the market has grown to 200 or 
more companies the volatility will be reduced a lot."  Supporters of 
rapid growth also pointed out that the risks of market manipulation 
and excessive speculation could best be reduced by substantially 
increasing the number of new listings.  A higher ratio of candidate 
firms was approved in the initial set of listings -- 93.5%.  Only 
61% were approved in the second batch.  If this represents a trend 
in 2010, the slow pace of new listings could increasingly be a 
concern. 
 
¶9. (SBU) At the same time, the number of Chinese firms listing on 
U.S. markets grew at the end of 2009 and show signs of even faster 
growth in 2010, according to media reports.  One such firm, 
4-year-old Guangzhou-based budget hotel chain 7 Days Inn, listed on 
the New York Stock Exchange in November 2009, spurning both the 
Chinese and Hong Kong stock markets.  7 Days CEO Eric Wu told 
econoff that U.S. markets are attractive for fast-growing firms like 
his because regulations are clear, application procedures smooth, 
and government interactions are predictable, unlike in China where a 
company's application to list might languish for months or longer 
while regulators decide whether firms are ready to be traded on one 
of the country's exchanges.  That delay can be costly to private 
firms like his because they lack access to capital markets and must 
rely on costly and unpredictable bank financing to maintain growth 
during any major expansion, Wu said.  In a recent Business Week 
article, Beijing-based NYSE Euronext Chief Representative Michael 
Yang predicted 2-4 times as many new Chinese listings on his firm's 
board in 2010 with the other U.S. and European markets also vying 
for many of the same potential listings. 
 
¶10. (SBU) Comment: Despite growing external competition from foreign 
boards for new Chinese listings, it appears that authorities will 
continue to take a cautious approach when allowing new start-up 
companies to list on ChiNext in order to protect investors from 
exposure to "irresponsible" companies.  The cautious attitude of 
regulators was apparent in China Securities Regulatory Commission 
(CSRC) Chairman Shang Fulin's comments at the new board's opening 
ceremony.  "Most of the ChiNext firms are in the high-growth period. 
 We should know that their performance could be unstable, their 
business model and long-term profit-making ability have not been 
tested," he said.  The successful opening of the ChiNext board shows 
that regulators are willing to use markets to expand options for 
firms in need of capital, but the repeated delays that preceded it 
and signs that the pace of new listings will be slow indicate that 
regulators' comfort with market forces is limited.  End comment. 
 
JACOBSEN