A star is born

The US-China trade war continues to evolve. Trump’s tariffs have slowed the Chinese economy and in response, China is developing weapons of its own, one of which was launched this week.

The Star Market (or “Star” as it’s known) is China’s answer to the Nasdaq, the US’s premier tech index. Beijing hopes the new board will encourage investment in domestic tech companies and lead to more Chinese companies listing at home rather than overseas. It also hopes to entice global behemoths, like Alibaba and Tencent, back from markets in NYC and HK.

Star’s development was announced by President Xi less than a year ago, so the Chinese have clearly acted fast as trade war tensions have escalated. China is doing all it can to counter American pressure on its tech industry, after the blacklisting of Huawei. This is tit-for-tat, with the weaponisation of stock markets considered fair game.

Star’s launch is evidence of the ongoing westernisation of Chinese capital markets and another step towards financial market reform, notable also as Star features a US-style system for initial public offerings. China is now offering full-service capital market capabilities onshore and growing companies (on paper) now have no need to look overseas.

The initial signs are good for Star. Trading on the first day of launch in the initial batch of 25 companies was positive, with chipmaker Anji Microelectronics Technology surging 520% and the average increase across the index was an almighty 140%. Many new Chinese billionaires have been created as a result.

The rest of the week saw a cooling off as investors took profits. But what’s clear is that the US and China have a new weapon in their armoury: stock markets. With capital ownership deeply intertwined between the US and China, both are seeking creative, destructive ways to bend the other to breaking point. Both economies are interdependent, but, until now, when it comes to stock markets, the relationship has been one-sided. Chinese companies have listed in the US (with a combined market value of $1.8 trillion), but no US companies are listed in China.

Star could change that in two ways. First, by allowing Chinese companies to list onshore, rather than overseas. And second, by tempting US companies to list in China, given the size of the potential for business and growth there as the country continues to develop.

What’s clear is that the Chinese government wants to keep its tech champions close to home and the capital that comes with them even closer. If domestic listings proliferate and Star flourishes, momentum should gather. This would cement Chinese technology – and the accompanying capital markets infrastructure – at the top of the global financial food chain.

Whilst it’s important to understand the reason why China launched Star at this time (Trump’s trade war), it’s worth taking a broader view and assessing how the continuing evolution of global markets, whatever their driving forces, is only going one way. It feels like Star is another step towards the maturation of global markets.

Interestingly, this process isn’t happening how one might have expected. Rather than a boom in interconnectivity and cooperation, development is leading to regionalisation. As markets grow, they become more siloed. Chinese markets have gone through a huge transformation in the past decade and, as they reach maturity, they’re choosing to go it alone.

We should keep an eye on other ‘less mature’ capital markets (such as in India, Indonesia, Turkey etc) as they develop too. As their own base of wealth grows and their own venues and infrastructure develops, it will be telling to see whether they choose to marry up with the international financial powerhouses or, like China, choose to seek “regionalisation”. As in politics, it seems that polarisation, protectionism and isolationism is the current global order of the day in markets too. How this affects the world over the long term remains to be seen.