After a year of operation, investors on ChiNext learned a valuable lesson: A market bent on fancy technology and innovative ideas doesn't necessarily lead to high returns.

It is unclear whether Chinese regulators will set a capital threshold or other restrictions on investors trading on the international board. But one thing is certain: there will be a supply shortage of equities when the market kicks off. In other words, if authorities don't allow a large number of companies to go public at one time, shares of overseas firms are likely to be massively oversubscribed. As a result, they will trade at a premium to their counterparts listed in foreign markets.

In the long term, Chinese investors will benefit if they gain access to the world's best organized and most profitable companies. The problem, as is always the case in China, is that institutional investors will get access first - either as cornerstone investors or first-movers who cash out when the speculators flood in.

Education vital

It is a recipe for volatility and not the image Shanghai wants to project as it bids to be an established, respected and orderly financial hub.

One of the priorities for the securities regulator is education. Protecting the interests of minority investors is as important to the development of China's capital markets as bringing in foreign companies.

Investors must be told about the risks of the international board. They must be given complete and timely access to information about the participating companies. They must be given a wider array of investment options - stock index futures, short-selling and margin trading, which are now being tried out in China - to help manage liquidity.

These measures should be included in a comprehensive plan for the international board that maps out how it will evolve - in size and sophistication - over the next two years. Investors also need to be aware that a new market is no guarantee of making money, even if it boasts members of the Fortune 500.

What also we need is a solid, share-pricing mechanism and a market that's effectively regulated. The watchdog needs to arm itself with stiff penalties against those who abuse the IPO pricing system.

Any collaboration between underwriters and institutions to artificially inflate prices must be disclosed and the culprits severely punished. Underwriters should be held accountable for their misbehavior even if it comes to light months after a listing.

It is time to get tough and ensure IPO pricing on the international board is transparent, reasonable and rule-abiding.

That would go a long way toward buoying investor confidence and reducing volatility in the market.

(Shanghai Daily November 29, 2010)