2019.01.18 Zhang Wei Views:
China Securities Regulatory Commission (CSRC) says it’s pushing ahead with the reform and opening-up of the capital market by accelerating the pilot program of Shanghai’s Science and Technology Innovation Board, also known as the STAR Market. CoStone Zhang Wei published an article on the Nasdaq-style STAR Market in Securities Times. The article is as follows:
China Securities Regulatory Commission (CSRC) says it’s pushing ahead with the reform and opening-up of the capital market by accelerating the pilot program of Shanghai’s Science and Technology Innovation Board, also known as the STAR Market. CoStone Zhang Wei published an article on the Nasdaq-style STAR Market in Securities Times. The article is as follows:
CoStone Capital Zhang Wei
The original purpose of establishing China’s capital market was to resolve the financing distress of state-owned enterprises (SOEs). And traditionally, China implements a quota system under which companies seeking to go public must receive approval from CSRC. Under this approach, CSRC uses accounting numbers (e.g., ROE) among others to decide whether to list a company or not. Profitability and asset utilization were effective assessment indicators in the Industrial Age, but they no longer apply as the world has been into a new era of knowledge-based economy. The STAR Market will mark a radical shift from the current lengthy and cumbersome process for IPOs. The board’s registration-based listing procedure will reduce regulatory red tape and allow start-ups that have yet to turn a profit to list. But to succeed, the board need to take a market-oriented and law-based approach.
The STAR Market is a ticket to a more market-oriented economy.
As the industrial age gives way to the digital age, the intangible assets such as IP and trademark are of growing importance. Take IP as an example. Sometimes just one patent is enough for a small, obscure company to grow into a big giant. Any investor capable to spot a chance like that can receive juicy returns that exceed their anticipations. Sunward (002097) and SenseTime are two portfolios of CoStone Capital. The former has boosted its profitability prospects with one patent, and the latter has developed into one of the leading AI companies with its top-notch world-class original technology.
Both of the two companies have unleased great potential for growth, which has returned handsome profits for investors in turn. However, neither of them could be able to get listed on the A-share market at a time when they needed capital the most. It’s either because of low profitability or the “red chip structure” that blocks their way. The A-share market also missed out on the flotations of internet giants like Alibaba (9988. HK), Tencent (0700.HK), Baidu (BIDU. NASDAQ) and JD (JD. NASDAQ), which led to a great loss on digital dividends for domestic investors.
By contrast, 20 years of losses did not get in the way of Amazon (AMZN. NASDAQ)’s listing in the US, and its stock has witnessed 1000-fold gains. And Tesla (TSLA. NASDAQ) had not been earning any money for 15 years and now it’s worth around $50B, without much fear of being delisted. Whether a company should be listed or not and how much it should be valued are supposed to be up to the market. Those administrative restrictions are suggested to be removed for the Sci-tech Innovation Board. Since there are times when experts cannot tell which companies have the potential to grow, it’s better to let market forces determine where best to invest.
Delisting System is the key to allocate resources in the best way.
“Survival of the fittest” is the natural law applying to delisting system which is one of the basic systems of the capital market. Delisting has been perceived as normal in a mature capital market.
The lack of delisting system in China’s capital market has caused irrational pricing by investors, which is driving the market away from the goal of optimizing resource allocation. Non-eligible companies seldom get delisted, so they strain resources which should have been allocated to good companies. That is a typical example of “bad money drives out good”.
Fortunately, the STAR Market doesn’t have to bear the “burden of history” of this kind. That’s why it’s important to build an effective delisting system to make sure the STAR Market get off on the right foot and stay completely on track with it. In this way, the capital market can play its part in “natural selection” and resource allocation so as to raise the bar for listed companies. To establish a mechanism that would enforce delisting is an important step to maturity and healthy development for China’s capital market.
Keep a legalistic eye on STAR Market
A mature capital market cannot do without rulemaking. It takes a set of rules and regulations that go with the STAR Market for the securities market to avoid falling off the wagon.
An immediate concern in terms of corporate governance is to reform the system of Individual Directors adopted from the Common Law and the system of Board of Supervisors from the Civil Law. 30-year history of China’s capital market suggests that Board of Directors and Board of Supervisors have not been fulfilling their functions of monitoring the directors and executives.
Moreover, there are quite a few loopholes in trading system. Stock market crash and the hasty circuit-breaker mechanism after the meltdown in 2015 plus share-pledge crisis in 2018 are cases in point.
The rules and regulations should remain the same for all types of market participants and everybody is obligated to abide by regulatory mandates. A solid legal foundation in line with market principles will help to lay the groundwork for the STAR Market.
Rewitten by Lu Ying, Edited by Zhang Wei
Over the past year, the bull market returned, with technology leading the way.
As I said back in October 2024, the rally that began on September 24 was not merely a rebound, but a reversal. Since then, China's capital markets have undergone a broad revaluation, moving from undervaluation toward fair value.
The Shanghai Composite Index reached its highest level in a decade. The "Yi-Zhong-Tian" trio—Eoptolink, Zhongji Innolight and TFC Communication, three prominent Chinese optical communications stocks—saw their share prices multiply severalfold in a single year. Cambricon's market capitalization briefly exceeded RMB 600 billion. Elsewhere in the technology sector, triple-digit price-to-earnings ratios and valuations exceeding RMB 10 billion became commonplace.
Some investors were greedy; others, fearful. Still others asked me: Are technology stocks in a valuation bubble?
My answer is that what we are witnessing is the hunger and anxiety of an era, reflected in the capital markets. Once you understand this, the current fervor for technology investing is no longer difficult to explain.
Investment has nothing to do with macroeconomics, but everything to do with geopolitics.
China-US relations will shape the investment landscape for decades to come. Geopolitics has played a major role in shaping the hunger and anxiety of our times, fundamentally reshaping the way we invest.
What, then, lies at the heart of China's hunger and anxiety?
The Fourth Industrial Revolution is already underway, yet China has not fully overcome the technological shortcomings left by the Third. There is no time to lose.
This is why some people wonder: Why do Chinese computing chip companies command such high valuations when their technologies still lag so far behind NVIDIA's? Why does NVIDIA trade at just 50 times earnings, while a company hailed as "China's answer to NVIDIA" commands a multiple of 300?
To me, this gets the logic exactly backward.
It is precisely because these companies cannot catch up with NVIDIA in the near term that they command a higher strategic premium. The wider the technological gap, the greater the strategic value.
The further something lies beyond our reach, the stronger our hunger. The harder it is to catch up, the deeper our anxiety. If China were to achieve a complete breakthrough in computing chips one day, valuations might actually come down.
Where can one find China's most spectacular natural landscapes?
Much of the answer, I believe, lies in and around the Hengduan Mountains: the Meili Snow Mountains, Jade Dragon Snow Mountain, Mount Gongga, Mount Siguniang, Jiuzhaigou, and many others. Vast differences in elevation and deep fault lines have given rise to landscapes of extraordinary grandeur.
Hard-tech investing follows a similar logic.
Technological gaps, discontinuities in capabilities, and missing links in industrial systems: a leap in difficulty brings a leap in valuation, and a successful breakthrough can, in turn, bring a leap in returns.
This logic extends well beyond computing chips. It is equally evident in memory semiconductors, commercial spaceflight, and other sectors where China still faces substantial technological gaps with other countries.
It was precisely this conviction that led CoStone Capital, starting in 2016, to decisively focus its investments on three areas: hard tech, emerging industries, and life sciences and healthcare. In this context, "hard tech" refers specifically to important industries in which China faces a technological gap with the United States.
Thanks to this forward-looking strategy, CoStone Capital established an early presence across the full value chains of key sectors, including semiconductors, artificial intelligence, and robotics.
Looking ahead, the frontiers of technological progress and industrial upgrading are boundless. Nor can the gaps in hard technology be closed overnight. The twin windows of opportunity presented by technological innovation and the development of homegrown alternatives to foreign technologies have only just begun to open.
The road ahead is long, but the future holds immense promise.
As an investment firm, CoStone Capital will continue to invest where the hunger and anxiety of each era run deepest, move forward with the tensions that shape our times, and extend our reach toward the most challenging—and most important—frontiers.
Spring 2026