China will be launching a Nasdaq-style stock market for technology and research-driven companies to list and raise capital. While it has some detractors, Franklin Templeton Emerging Markets Equity believes this upcoming board is of strategic importance to China. Jason Zhu, director of portfolio management—China Equities, says it could rev up China’s emergence as a research powerhouse and help emerging companies grow into industry champions, but the team will be watching at least two key factors—the quality of companies listed and their valuations.
In November of last year, Chinese President Xi Jinping unveiled plans to launch a science and technology innovation board on the Shanghai Stock Exchange. The board promises to accelerate innovation in China by offering a dedicated platform for technology and research-driven companies to list and raise capital. Market observers have been quick to draw parallels between the board and the United States’ Nasdaq.
We are positive about the move. We believe the sci-tech board is of strategic importance to China as it presses on with economic restructuring. The board could rev up the country’s emergence as a research powerhouse. Despite widespread perceptions of China as a skilled imitator, it has begun to lead as an innovator in several areas. Consider how it topped the world with a 43.6% share of global patent filings in 2017—more than double the United States’ 19.2% share—or how its research and development spending has risen to 2.13% of its gross domestic product, compared with an estimated 1.96% for the European Union.1
In fields where China needs to catch up, the board could bring in funding and give it a vital leg up. Overall, we see the sci-tech board making an impact in several ways.
- Broaden Access to Private Capital
Equity markets are central to capitalism—they link companies hungry for cash to investors seeking returns. China’s liberalization in the past few decades has been accompanied by the blossoming of its stock markets, which helped fuel the rise of “old economy” giants in areas such as energy, mining, property and banking amid the country’s investment-led growth. Most of these companies had proven themselves with established business models before they could list. But China’s economic priorities have evolved. So too, should its financial markets. As China pins mounting hopes on innovation to drive higher-quality growth and technological breakthroughs, we think the sci-tech board’s creation is timely. It would enable not just high-tech start-ups to raise cash, but also venture capital and private equity funds to exit their investments and redeploy capital. Altogether, the board could encourage private capital investments in the technology scene.
The implications go further. A stock market that better serves China’s real economy can potentially improve capital allocation in a country that has been criticized for handing out state subsidies and other forms of aid. We see the sci-tech board creating room for the government to reduce support, which should strengthen the economy’s efficiency and longer-term resilience.