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. That may be about to change
after authorities announced a trial of so-called Chinese depositary receipts -- a bid to entice home the tech giants and attracting the next crop.
1. What exactly are Chinese depositary receipts?
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. The CDR would be China’s version of the ADR, bought and sold in yuan on Chinese exchanges.
2. 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 variable interest entity structure (which turns a Chinese company into a foreign one with shares that overseas investors can buy) or a dual-class share structure (that gives founders outsized control of a company). Neither setup is allowed on the mainland. With CDRs, both would be permitted.
3. What would a return home look like?
Companies with a primary listing in an international market such as Hong Kong or New York could choose to issue CDRs on mainland China. Alternatively, they could go for a domestic initial public offering. Mainland regulators proposed tweaking IPO rules in March to give them rights to waive certain listing requirements for companies they want back. Foreign-registered Chinese firms that are not yet public may also participate, through either an IPO or CDR, if they are worth more than 20 billion yuan ($3.2 billion) and had revenue of at least 3 billion yuan in the past year.
4. 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.
5. How will the trial work?
The pilot applies to companies that went public overseas and have a market value of more than 200 billion yuan. Certain private companies will also be eligible.
6. Which companies might qualify for the trial?
Xiaomi Corp. and Alibaba affiliate Ant Financial are among 30 so-called unicorns -- private companies valued at more than $1 billion -- that may meet valuation requirements, according to China International Capital Corp. Five Chinese red chips also may qualify, namely Alibaba, Tencent, Baidu, JD.com and NetEase, analysts led by Hanfeng Wang wrote in a note.
7. What would China’s plan mean for Hong Kong?
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 is said to be considering -- could work to Hong Kong’s advantage.
The Reference Shelf
- Why China’s latest crop of tech stars will ignite a feeding frenzy among investors.
- The 1.4 trillion reasons why China is looking to bring back technology companies.
- China’s top tech firms are heeding the call to return home.
- A Bloomberg opinion piece on why China’s tech supremos may shun the country’s latest efforts to win their affection.
— With assistance by Benjamin Robertson, Gary Gao, and Andrea Tan