Securities regulators in China are reportedly considering a plan to allow overseas-listed companies to float on the domestic exchanges through the Chinese depositary receipts (CDR) route.
That would allow Chinese internet giants such as Tencent Holdings (00700.HK), JD.com and Alibaba, now listed in Hong Kong or the US, to list on mainland stock exchanges.
At the moment, there are a number of obstacles.
Many of the big Chinese tech firms have used a legal structure called “variable interest entities” (VIEs), in order to obtain overseas financing. Many have done so by forming holding companies in tax havens and listing their shares in US or Hong Kong.
To list in China, these firms have to dismantle the VIE structure, which would be extremely difficult.
Also, some internet firms have dual-class share structure, which is not allowed by Chinese regulation.
There are also concerns that if these tech behemoths return to China for listing, there will be an excessive supply of new shares, which could drain too much capital and put considerable pressure on the overall market.
China has been mulling an international board as another option. But the precondition is free capital flow and a fully open financial market. Such criteria won’t be met any time soon.
As a result, Chinese authorities are facing a dilemma. On one hand, they want the internet giants to list at home. On the other, these firms can’t officially list on domestic exchanges in the short term due to various restrictions.
Amid this situation, Chinese Depositary Receipts (CDR) would indeed be a way to get around the restrictions.
However, it’s far from a perfect solution.
First of all, Chinese investors may not get sufficient protection if they invest in these CDRs, as they have to accept VIE and dual-class share structure.
Second, if only a small amount of depositary receipts are issued, like in the case of PetroChina’s listing in the US (American Depositary Receipts of PetroChina only account for 4 percent of its capitalization), prices of CDRs might be too volatile, or subject to the risk of being manipulated.
This article appeared in the Hong Kong Economic Journal on March 6
Translation by Julie Zhu
[Chinese version 中文版]
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