China to use depository receipts for offshore equities as country is unprepared for dual-class stocks
Equity investors in mainland China will have to use either the nascent Connect programmes or the soon-to-be-launched Chinese depository receipts (CDRs) for gaining access to offshore stocks, because the country is not ready for companies with multiple classes of stocks to list, said the head of the Chinese pension fund.
“There are many manipulative activities in the Chinese market” so the scheme on the Hong Kong stock exchange that allows companies with multiple classes of stocks to raise capital can’t work on the mainland, said Lou Jiwei, the former finance minister who now heads China’s 2.5 trillion yuan (US$390 billion) retirement fund. “Hong Kong has launched it, but it’s not time yet for China to do the same.”
Weighted voting rights, also known as multi-class stocks, are favoured by technology companies from Alibaba to Facebook and Google, as they enable founder-entrepreneurs to maintain control of their companies, even with minority stakes. They are so critical to attracting technology start-ups that Hong Kong’s securities regulator and stock market operator pushed through the biggest changes in the city’s listing rules in three decades to accommodate them. That wouldn’t be the case in China, Lou said.
Instead, Chinese investors will rely on depository receipts which will be issued by custodian banks in exchange for shares of offshore-listed tech companies such as Alibaba, Baidu and Tencent Holdings. Another avenue is the Connect programme, through which the exchanges of Shanghai and Shenzhen are linked with Hong Kong.
The Chinese retirement scheme will maintain a “moderately overweight” weighting of Hong Kong’s market and investment more in stocks in the scheme, Lou said. Hong Kong’s benchmark Hang Seng trades at 12.5 times earnings on average, cheaper than the 14.9 times on the Shanghai Composite Index, and the 28.3 times on the Shenzhen Composite.
As an international financial hub, Hong Kong has a valuable role to play to support mainland China’s commitment to open and reform its economy, said the former People's Bank of China governor Zhou Xiaochuan, at the same forum.
By launching the Stock Connect, Bond Connect, and the mutual fund recognition programme, Hong Kong is helping to channel overseas investments into mainland companies, provide a platform for them to expand overseas, improve their corporate governance, and enable Chinese firms to better compete on the global stage, Zhou added.
Still, there’s a gap in the number of trading days and hours between the two ends of the Connect scheme. Mainland investors get 90 minutes less trading time everyday than their Hong Kong peers, and 20 fewer trading days every year.
If the trading durations and regulations between the mainland and Hong Kong can be synchronised and improved, then “institutional investors like the [pension scheme] can help expand the Stock Connect,” Lou said. “We also face pressure to maintain and increase the value of our assets.”
The NSSF, established in August 2000, has managed a total of 2.54 trillion yuan of assets by the end of 2017, according to Lou.
By asset value, the NSSF is the sixth largest pension fund in the world, after Japan, Norway, the US, South Korea, and Netherlands, according to data compiled by Willis Towers Watson at the end of last year.
In 2017, the investment return ratio for the NSSF reached 9.68 per cent.
The fund has so far focused its investments in domestic, with Hong Kong among its key markets, Lou said.