The number of mainland firms issuing American depositary receipts (ADRs) will increase sharply in the next three to five years, when China will rival Japan as the top Asian issuer, according to Joseph Velli, a senior executive vice-president of Bank of New York. The bank is the largest depositary for American and global depositary receipts, which allow non-United States companies to offer US dollar-denominated securities to investors worldwide. Last year, China accounted for just 2 per cent of all depositary-receipt programmes - the same as Ireland, Chile and Singapore - compared with 10 per cent for Japan. 'Over the next three to five years, it will be a close race between China and Japan,' Mr Velli said yesterday. 'Japanese companies need to diversify their shareholder base and Chinese firms want to become global companies. 'I am looking at the top two or three firms in each major sector, like oil, gas, telecoms and pharmaceuticals, as well as 'special-story companies' such as in high technology or bio-tech.' He said institutional investors were positive on China as a whole. 'They prefer better-known companies with proven track records and industries they understand,' Mr Velli said. 'Of ADR demand, 30 per cent to 40 per cent comes from retail investors who want to diversify their portfolios. China Mobile and China Telecom are very successful with retail investors. 'China is still a good story in the medium and long terms for European and US investors.' The main problems for issuers are disclosure, the need to conform to US accounting standards, which can take up to two years, and the cultural issue of maximising shareholder value. He said last year had been difficult for ADRs, with companies hesitant to move forward because of lack of demand. 'The first half of this year will be slow but we expect an improvement in the market in the second half because of a strong pipeline of companies waiting to list, a pick-up in cross-border merger and acquisitions, the return of global companies to US capital markets, as well as US investors continuing to look overseas for greater returns,' Mr Velli said. He expects between six and 10 Chinese firms to list ADRs this year. Asked why these companies should list in the US when they could raise money more easily on domestic markets, Mr Velli said they wanted to diversify their shareholder base, stabilise the stock price, expand in the US for commercial and brand reasons and could not raise enough capital at home. 'They want to be global. They have to get a cross-border listing,' he said.