China Focus: Startup board boom heralds new economic drivers, risk

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The surge of Shenzhen's ChiNext board has stoked hopes that technology and innovation will play a bigger role in supporting China's plateauing economy.

Despite a three-year lull in growth after it went online in 2010, the ChiNext board has become a magnet for small and medium-sized private enterprises and startups.

Starting from a tiny pool of 28 enterprises, the NASDAQ-style board is now home to around 450 companies in emerging industries such as electronics, information technology, new energy, new materials, environmental protection, high-end manufacturing and bio-medicine.

Its market value has grown more than thirtyfold in five years to top 4.7 trillion yuan (769 billion U.S dollars). The ChiNext Index has hit multiple record highs this year, breaking the 2,000 mark in early March and the 3,000 mark on Monday.

The board's boom did not come out of nowhere. Encouraging innovation and entrepreneurship has become the Chinese government's refrain when traditional growth drivers such as exports and consumption lose steam.

Innovation has become all the more important as the government is determined to pull off a managed slowdown in its quest for more sustainable growth led by consumer spending and innovation.

More than 3.65 million new enterprises were registered last year, thanks in part to government efforts to cut red tape.

In an apparent effort to help new enterprises raise capital, the China Securities Regulatory Commission (CSRC) has accelerated IPO application approvals.

The CSRC announced on April 24 that two rounds of IPO applications will be approved every month, up from one previously. More than 200 IPOs are planned for this year.

However, experts have sounded the alarm that risks are quickly building in the startup sector, with the prices of some shares out of line with the companies' fundamentals.

ChiNext-listed companies boast an average price-earnings (PE) ratio of more than 100, five times the level for those listed in Shanghai. The figure is higher than the historical high of its U.S. counterpart, the Nasdaq Composite. The PE ratio compares a company's market value versus its earnings per share, and a high PE ratio may indicate a speculative bubble.

"The recent sharp rise of the ChiNext Index is driven by cash and speculation, with the PE ratio of some shares entering risky high territory," said Wang Jianhui, an analyst with Capital Securities.

For example, online video company Baofeng Technology surged more than 2,000 percent to around 230 yuan per share as of Tuesday from an offer price of 7.14 yuan in March.

Despite a lackluster Q1 performance, the company's share price has defied market volatility, jumping by the 10-percent daily limit on nearly every trading day, including Tuesday.

Qtone Education, another "wonder stock," skyrocketed 1,600 percent to reach 425 yuan per share in only 16 months. It was the second stock on China's stock exchanges to top 400 yuan per share. Yet the Q1 net profits of the Guangdong-based company, which specializes in online education, actually slipped 22.7 percent.

The steep rise of stocks such as these can flare up risks of overheating for the whole startup sector, analysts have warned.

The ChiNext Index closed at a record high of 3,250.3 on Tuesday, surging 3.29 percent. Endit

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