They may not exist, but Chinese depositary receipts became a hot topic at this year’s National People’s Congress in Beijing. That’s because regulators mooted them as a way of enticing mainland technology giants to list on their home stock market, the world’s second-largest. Baidu Inc., Netease Inc. and 58.com Inc. have all expressed interest in the idea, but it’s far from clear how such a system would work let alone when it would be ready.
1. Why is China keen on bringing companies back?
China has produced some of the world’s fastest-growing tech businesses, but mainland investors have been unable to easily share in the gains. The likes of Alibaba Group Holding Ltd. and Baidu Inc. have headed overseas to go public, leaving domestic investors to rely on staid state-run industries to get their fill of large new listings.
2. What exactly are Chinese depositary receipts?
No one is quite sure. While they’ve been discussed for more than a decade, they’ve never become a reality and there are no rules on the books that would allow them to come into being straight away. Around the world, depositary receipts are surrogate securities that allow domestic investors to hold overseas shares. So, for example, American depositary receipts package overseas equities and sell them in dollars on U.S. exchanges, with the underlying security held by a financial institution overseas.
3. Why did Chinese companies leave in the first place?
Among the reasons, access to global institutional investors, the cachet of a Wall Street listing and the ability to tap international bond markets without dealing with China’s capital controls. Also, many Chinese tech firms use a corporate structure, known as variable interest entity, that isn’t allowed on the mainland. Neither are structures such as dual-class shares that give founders outsized control of a company and are also favored by the likes of Alibaba.
4. What would a return home look like?
The details aren’t clear, but there would probably be a primary listing in an international market such as Hong Kong or New York, with a secondary share sale using a CDR-type structure in mainland China. Another option -- proposed by Shenzhen Stock Exchange general manager Wang Jianjun at the NPC -- would involve allowing dual-class structures in China. That would permit more simultaneous listings in Hong Kong and the mainland -- an approach already taken by about 250 companies including beermaker Tsingtao Brewery Co.
5. What are the hurdles for CDRs?
There are a host of unanswered questions such as currency denomination, capital controls and compliance with corporate governance requirements, according to Keith Pogson, global assurance leader for banking and capital markets in Hong Kong at consultant EY. One example: Under Chinese rules board meetings must be held in Mandarin; there’s no clear solution to how that would work for an international firm with a CDR. Gao Ting, head of China Strategy at UBS Securities Co. in Shanghai, said CDRs would be incompatible with current laws and any new regulations would need to be introduced slowly.
6. Would Chinese technology firms want to list at home?
China’s stock market sees an average $73 billion of trading a day, compared with $13 billion a day for Hong Kong. That’s an enormous new pool of capital for companies, said Bao Fan, founder at China Renaissance Partners, the firm behind some of China’s largest tech deals. He says many in the industry would be keen on a home listing in some fashion, noting that it would also provide a branding boost.
7. What would China’s plan mean for Hong Kong?
It depends on when and how the mainland changed its rules. Hong Kong will soon allow dual-class listings, a move designed to lure China’s technology titans and a strategy that could be threatened if a home listing became an option. Then again, a model where Chinese tech firms can go public in Hong Kong with a dual-class structure and also have some kind of listing on the mainland -- an option that Xiaomi Corp. is said to be considering -- could work to Hong Kong’s advantage.
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