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China Accelerates Its Timetable

Government backing of homegrown tech stocks is the next phase of a much larger plan.

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China has been doing more than just creating a separate supply chain. It has begun an entirely separate stock market with backing from the government.

Known as the Star Market, this offshoot of the Shanghai Stock Exchange includes some big-name companies such as Alibaba, Xiaomi and Tencent. But what’s particularly noteworthy is that the government is supporting top startups like governments back bonds or treasury notes. Stock prices will fluctuate, but there is government investment behind these companies, so it is assumed they are a safer investment than other stocks.

The announcement set off a wild ride this week, with the chosen stocks surging and then plummeting, leading some to question whether this will work out for China’s new exchange. Some financial experts described it as China’s answer to the NASDAQ. But to view this purely in the context of competitive financial markets misses the bigger picture. This is part of a long-range plan. Some pieces will work, others will fail. Still, the dots need to be connected to understand why this move is significant for China, as well as the global tech industry.

What’s clear is that China’s investment strategy is shifting. Rather than funding huge number of startups, the government is transitioning toward helping companies that are the most strategic to its future, or which are best poised for success—or both. The first phase was a joint venture between the government and private investors to fund nearly 3,000 startups. The best positioned of those startups will go “public” on the Shanghai or Hong Kong exchanges and raise capital the way most public companies do. They used to do this on foreign exchanges such as the NASDAQ, but there has been a sharp decline in Chinese IPOs this year outside of China. The remainder will either be acquired, or they will run out of funding and disappear.

There have been numerous reports over the past year about a falloff in China’s venture funding. This is consistent with the country’s overall sluggish growth, which has been hovering around 6%, according to government statistics. Those numbers are opaque to the outside world, and there is widespread suspicion they are lower, just as during boom years, there was reports that China’s 9% growth rate was understated. Regardless, there is more due diligence on the part of investors about whether tech startups will succeed, as reflected in much more targeted investment in areas such as memory, AI, fab construction and autonomous vehicles.

Much of this stems from China’s concern over its supply chain, and trying to separate out the long-term growth plan from the short-term reaction to the ongoing trade war with the United States requires a substantial amount of educated guesswork. Trying to read into China’s collective mindset is extremely difficult, and the country is experimenting with different options just as it did with the initial round of investments. What is clear, though, is that China is injecting financial support wherever necessary to prop up some of its leading technology companies and its most strategic startups in an effort to achieve technology independence. And in light of recent trade restrictions, that effort is now accelerating.

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