Growth Enterprise Market (GEM) is the brand new stock exchange of China. It is a NASDAQ style stock exchange aimed at providing finance to smaller companies.
It started trading last Friday, and on the first day of trading — created 13 paper billionaires. 28 companies listed on the GEM, aka ChiNext, and they rose between 76% and 210% in the first day of trading.
Itâ€™s another thing that 25 out of these 28 companies fell on the second day, and many of them fell by as much as 10% (which was the lower limit).
I read a few articles about ChiNext or GEM, and there were several things that caught my eye:
- Volatility: The first thing that I noticed was volatility. Anyone following the Chinese IPO market will not be surprised by it, but itâ€™s hard to not take notice of. Chinaâ€™s IPO market is the biggest in the world right now, and the IPO market is really hot there. Given this backdrop, regulators were expecting volatility, and it seems they have created some rules to curb speculation, and have warned investors that they will crack down on aggressive speculation.
- Spur Innovation: GEM is created to provide an exchange to start ups and smaller companies to list — create wealth for their founders, and fund future growth. GEM is much smaller than the Shanghai or Hong Kong Stock Exchange, but regulators hope that it will eventually compete with NASDAQ. Only 28 companies have listed so far, but many smaller companies are lined up to list on GEM and raise funds. GEM is made for smaller, technology oriented companies.
- Dominate something other than low cost manufacturing: A stock exchange of this kind looks to support smaller companies that are more nimble in nature, and are looking to make money by being more innovative, rather than being cheaper. This looks like a strategic thrust towards growing companies that can not only dominate low cost manufacturing, but also deliver high end technological breakthroughs.
- Correct Structural Imbalance: The Shanghai stock exchange is dominated by government enterprises and there are fewer opportunities for smaller and younger companies to list there. A lot of these companies end up listing in Hong Kong or overseas to raise money. By setting up a domestic stock exchange with the ostensible purpose of facilitating funding for smaller companies, — China is looking to bring a little balance to its stock exchange structure.
- Bold Action: While the rest of the world is busy worrying about double dip recessions, auctioning spectrum, declining exports or generally being gloomy, China is taking bold action. You would think that setting up a stock exchange just after such a bad bust would be difficult, — and yet, that is exactly what the Chinese have done.
It will be interesting to see how this stock exchange grows, and if it does well, it will certainly be a good model for a lot of other emerging countries to follow.