Shanghai’s Funhouse-Mirror Nasdaq Shows What’s Wrong With Chinese Markets

China wants its own Nasdaq to stop domestic tech stars from fleeing to list abroad. But its latest effort looks no more likely to be successful than the previous attempt.

The Shanghai Stock Exchange’s Science and Technology Innovation Board—inexplicably acronymed STAR—is the successor to Shenzhen’s ChiNext index. In its decade of existence, ChiNext has failed to foster tech superstars like Hong Kong-listed Tencent and New York-listed Alibaba.

The new platform is already falling prey to the wild swings common in Chinese markets, limiting its ability to provide a stable source of investment capital.

On Monday, the board entered the world with a bang, with its 25 stocks rising between 84% and 400%, before falling by around 9% Tuesday. Unlike other Chinese platforms, the STAR market doesn’t cap price movements in a stock’s first five days of trading.

Of course, many popular stocks in the U.S. surge in price on their first day. But not all of the stocks listed on the STAR market are new.

The biggest component of the board,

China Railway Signal & Communication
Corp.

, is perhaps the best symbol of the problem. The company already trades in Hong Kong with a forward-price-to-earnings ratio of about 10. That didn’t stop it from ending its first trading day in Shanghai with a multiple of 25 times, significantly higher than it has ever traded offshore.

It isn’t uncommon for a company’s mainland shares to trade at a premium to its Hong Kong-listed securities. But such extreme gaps should prompt caution: Whatever investors are trading on, it doesn’t seem to be company fundamentals.

That’s before even considering what happens to successful Chinese tech companies, which often become caught up in domestic politics, if they’re not squeezed between Beijing and Washington in conflicts over trade.

There are some positive reforms. Regulators have made listing easier, allowing smaller and even unprofitable firms to float. Well-intentioned rules to prevent pump-and-dump behavior have been implemented: Brokers are now required to hold 2% to 5% of a company’s shares for two years, though this could be compensated for with higher underwriting fees.

Even with the worthwhile tweaks, the board seems unlikely to address the core problem of Chinese equity markets: extreme volatility in an economy where property is the core investment and equity markets are for speculation.

Write to Mike Bird at Mike.Bird@wsj.com

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