The Big China Market Crash In Little Stocks

A 30% DECLINE in the Shanghai bourse’s Composite Index? Pish! The Chinese market that has taken the heavy pounding is the over-the-counter National Equities Exchange and Quotations (NEEQ).

The Beijing-based ‘third board’ soared higher and fell further than its senior brethren in Shanghai. Prices of NEEQ-listed companies more than doubled between early February and early April before giving up four-fifths of that gain by early this month.

NEEQ was launched as a trial in 2006 to provide a way for tech start-ups in science parks to gain access to a source of finance that wasn’t state-owned banks. Its remit was gradually broadened. At the end of 2013, the market was opened to any innovative company from any of the seven designated strategic sectors that it is hoped will tilt the next phase of China’s economy towards domestic consumption, such as healthcare, media and tourism.

Ease of listing has attracted more than 2,500 companies. Last year, initial offerings raised 13.2 billion yuan ($2.1 billion) of capital for such businesses.

As with the first and second (Shenzhen’s Nasdaq-like ChiNext) boards, investment money, including from new mutual funds, poured in the early part of the year, pushing valuations way out of line with fundamentals. That was only exacerbated by the relative thinness of trading. The Shanghai exchange turns over — or at least was turning over — 10 times the trade in a day as NEEQ is likely to do in a year.

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