Moving up

Alibaba kicks China's new tech board to big league

An endorsement by Alibaba has kicked China's upstart stock market to the big league. A soccer club part-owned by the Chinese e-commerce group will list on the country's "New Third Board", an over-the-counter market for small companies. With a combined market capitalisation of $200 billion, the platform is a welcome source of capital for tech startups, but investments are only for the brave.

The Beijing-based New Third Board was officially launched in 2013 as an alternative funding source for small companies. Since then, the board's operator has approved some 2,600 companies to list, with over 900 this year alone, mostly in tech. Investors - both institutional and qualified individuals - need at least 5 million yuan ($806,000) to open an account. Last year, the market got a boost in liquidity when it became the only OTC platform where brokerages can make markets in certain stocks.

The $60 million listing by Evergrande Taobao is small compared to listings on the main Shanghai Stock Exchange - not to mention the $25 billion US listing of the soccer team's 40 per cent owner, Alibaba. But such placings are adding up. Turnover of shares in the first five months of 2015 exceeded 88 billion yuan - more than six times the total in all of 2014. Companies traded at an average of 61 times earnings in April, compared to 26 times the same month last year.

The broader stock market frenzy in Shanghai and Shenzhen has helped. The New Third Board's main index is up over 50 per cent since the start of the year. The platform has also benefited from government policies to foster domestic tech. Companies need only two years of audited financials and no profits are required. The hope is that tech companies, which previously relied on US dollars for funding and needed complex offshore structures to do so, will stay at home if they have access to local venture capital.

Even if comparisons with the $8 trillion Nasdaq are premature, the New Third Board could foster a generation of tech upstarts. Yet, for investors, the risks are high: the exchange has already been hit with allegations of illegal trading and manipulation, prompting the operator to launch an investigation in April. China's aspiring venture capitalists need a large appetite for risk.