China's answer to the Nasdaq might be starting to fizzle

China's latest attempt to create a Nasdaq-style stock market appears to be running into trouble just three months in.

Posted Updated

Laura He
, CNN Business
CNN — China's latest attempt to create a Nasdaq-style stock market appears to be running into trouble just three months in.

The Shanghai Stock Exchange launched its Star Market toward the end of July, with wild gains in prices and a few eye-catching IPOs since. But it has been forced to cancel the launch of a new index based on the market that was planned for Wednesday.

The reasons: There were too few companies on the board to justify its own index, and those that are on it were "relatively too small" in size, the exchange said in a recent statement. (The market's latest member started trading Monday, bringing the total number of listed stocks to 34, up from 25 at launch.)

The pool of stocks on the Star Market is microscopic compared to other major exchanges in China that have their own indexes, including the main market in Shanghai and a tech-focused market in Shenzhen. More than 3,000 companies are listed on those markets combined.

Investors also expect any index involving Star Market components to be a critical one to watch, the exchange said. That makes it all the more important to wait until the index is able to provide a better representation of the market, it added.

That's a pretty cool assessment of the market, especially given its remarkably hot debut. Stocks gained an average of 140% on the first day of trading. One company, Anji Microelectronics Technology, closed up 400%.

As of Wednesday, though, more than 90% of the stocks on the Star Market have lost about a third or more of the value they held at their peaks, according to data from Wind, a Chinese financial information provider.

"Apparently, the investor enthusiasm has faded," said Mark Huang, an analyst for Bright Smart Securities in Hong Kong. While the valuations of the Star Market companies are still high, they are returning to more "reasonable levels," he said.

The Star Market is part of China's bid for tech superpower status. Beijing hopes it will help China's tech companies tap into the vast wealth held by local investors. The country also wants to entice global leaders like Alibaba and Tencent to return to China from stock exchanges in New York and Hong Kong.

Huang said investors are probably going to pay close attention to upcoming earnings for the companies that are listed on the board — an opportunity to assess the quality of companies that are supposed to represent China's future.

Huang added that the board needs to attract more quality companies, so that it has a bigger pool of them to select for the component index. The Shanghai Stock Exchange has indicated that 50 companies will be included on its index — but only if there are more than 50 companies on the board. Otherwise, all of the stocks could be added to the index.

The Star Market may be on its way to adding more firms. As of Friday, the market had accepted applications from 162 companies, 42 of which completed the registration process.

"The board is still in a very early stage," said Hao Hong, managing director and head of research at Bank of Communications International.

He attributed the pullback seen in stock prices on the market to lower expectations from investors, adding that the board hasn't attracted much money yet.

"I think lots of investors still have a wait-and-see attitude," he said.

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