TAIPEI (TheStreet) -- China started clearing its long IPO queue this year to reanimate weak stock markets after a 14-month ban on IPOs. Consistent with that full-on approach, the country's board for growth enterprises will relax financial requirements and usher in a flood of newly public, hapless companies that you've never heard of.
Their shares are risky and should be avoided. A relaxation of rules will just allow more shady shares to be traded as new companies reach the market.
An easing of the China Securities Regulatory Commission's pre-IPO financial requirements was announced in mid-March. That will add to the ChiNext board's 379 listed companies, per speculation in the Chinese media. Most are tipped to be tech firms, like 93% of those listed now, but not the likes of China's headline Internet content providers or handset makers.
A lowering of the bar for this Nasdaq-style board advances China's overall goal to grow its economy through a maturation of capital markets, which are now widely considered unsafe due to lack of regulation, transparency and value for minority shareholders. Smaller firms, including those that lose money but are backed by assets, need a chance to start out, the ChiNext regulators probably figure.
China resumed allowing IPOs for its main A-share board after a freeze to stop fraud. That move followed leadership pledges of IPO procedural reforms and a stronger market role in an economic overhaul. China is probably looking to the IPOs to sustain economic growth that slowed to 7.8% last year, coming off a decade of 9% to 10% growth. Some 700 companies are in line for A-share IPO approval now.
ChiNext was launched in 2009 and has a total market value of 1.83 billion yuan ($29.5 million). This year ChiNext has seen IPOs by companies such as Beijing Tongtech, a middleware R&D firm, and bank equipment toolmaker Hebei Huijin Electromechanical.
These obscure names hardly compare to flagship Chinese tech firms such as online encyclopedia Baidu (BIDU) or handset maker TCL Communication (2618.HK).
Chinese investors with a penchant for risk may trade these shares, looking for hidden value or fast growth. But larger, more cautious funds will stick to China's larger-cap A-share market. Those include the roughly 230 foreign investors with permits to trade on the mainland's bourse.
Others looking to invest in China will study the H-share index in Hong Kong or pick NYSE-traded Chinese companies linked to the country's boom in consumption. China Telecom (CHA) and China Mobile (CHL), for example, are supplying the country's increasing, fast-changing Internet usage.
ChiNext may ultimately pump capital into the next Baidu or TCL. But there's no way an outsider can tell which companies those are yet.
"Traditional funds might stay away, though you might see locals with some higher risk appetite," says Lorraine Tan, equity researcher with S&P Capital IQ in Singapore, talking about the new IPOs. "It's the risk you'd get with lack of transparency. You're not very sure of their background or level of experience."
There's no need to waste time or money on ChiNext for now.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.