China’s regulator quietly removes capital-sapping CDRs as it vows reforms to soothe frayed nerves
China’s stock market has lost US$2 trillion in value since the benchmark index fell 24 per cent from a January high
China’s securities regulator quietly removed an ambitious and controversial financial instrument from its agenda as it seeks to soothe frayed nerves in the country’s second bear market since 2012.
The regulator will commence by the end of 2018 a cross-border investment channel called the London Stock Connect, which will enable Chinese investors to trade in London-listed equities, and for UK investors to buy Chinese stocks.
The regulator will also support the inclusion of Chinese equities into the FTSE Russell global indexes, and press to increase the weightings of Chinese stocks in the MSCI benchmark, according to a statement on its website.
Missing from the statement is any mention of Chinese depositary receipts (CDRs), a financial instrument aimed at letting local investors partake in the financial rewards of such tech behemoths as Alibaba Group Holding, Baidu, Xiaomi and JD.com, most of which are listed offshore due to regulatory hurdles at home.
Liu Shiyu, chairman of the China Securities Regulatory Commission (CSRC), has good reason to tread with trepidation. Chinese equities have lost a combined US$2 trillion in value since January, last week ceding the title of the world’s second-largest capital market to Japan.
The Shanghai Composite Index was down this month by as much as 24 per cent from its January high, landing Chinese equities in their second bear market since a 2015 stock rout.
“Investors’ confidence has been pretty fragile over the past two months,” said Wu Kan, a fund manager at Shanshan Finance in Shanghai. “Investors have been disappointed by the lack of progress in the fundamental development of the capital market, such as the procedures for delisting bad companies and further liberalisation. Now, the regulator is doing something we want to see: improve the quality of both listed companies and investors.”
For several months this year, the CSRC was arm-twisting Xiaomi, the first technology stock to raise capital in Hong Kong under a new listing regime, to simultaneously issue up to US$5 billion of CDRs in Shanghai. That single issue would have been equivalent to as much as 14 per cent of the entire fundraising of all initial public offerings by Chinese companies last year.
The regulator would suspend Xiaomi’s CDRs in mid-June after finding issues with the company’s business model, but not before spooking the Shanghai Composite Index into a decline. The deteriorating trade war with the US cast an additional pall over Chinese stocks, driving more money out of the market.
With the damp squib off the table - and with limited downside since the index’s retreat from a 25-month high in January - the regulator is setting its sights on improving the Chinese capital market for the long run.
The regulator will optimise the rules on share buy-backs by publicly traded companies and encourage employees in state-controlled firms and financial institutions to hold shares in the entities. It will also push for accelerating implementation of deregulation allowing foreign investors to have bigger stakes in securities firms.
Changsheng Bio-technology, a Shenzhen-listed bio-pharmaceutical firm that allegedly forged data on a vaccine, may be expelled from the exchange under a new set of delisting rules unveiled last week that made provisions for the first time to kick out bad corporate citizens.
The Shanghai Composite Index rose for the second day this week after the regulator’s statement, gaining by as much as 2.8 per cent to the highest intraday level in six days.
“The regulator is plugging the loopholes in the ground work for the market system,” said Wang Chen, a partner with Xufunds Investment Management in Shanghai. “That’ll help the market to find its bottom more quickly.’”