Beijing fast tracks foreign-listed Chinese tech firms’ A-share flotation with CDR system launch

Guidelines published by Chinese regulator on March 22 take immediate effect after State Council endorsement

PUBLISHED : Friday, 30 March, 2018, 10:24pm
UPDATED : Saturday, 31 March, 2018, 11:07am

Beijing formally offered a fast track for overseas funded Chinese technology behemoths to raise funds on mainland stock exchanges on Friday, after the State Council endorsed the Chinese Depository Receipt (CDR) mechanism at lightning speed.

The State Council said qualified innovative companies with valuations of no less than 20 billion yuan (US$3.2 billion) and annual revenue of at least 3 billion yuan could embark on the CDR system to either float additional shares, or launch initial public offerings on the A-share market.

The guidelines on CDR, which were prepared by the China Securities Regulatory Commission (CSRC), were approved by the Cabinet on March 22 and published on Friday evening, less than a month after the regulator announced its plan to do so.

Under the CDR system, part of a company’s shares are transferred to a custodian bank, which sells them on an exchange abroad.

“The pace at which approval was granted for this deregulatory plan has rarely been seen in China’s capital markets before,” said Cao Hua, a partner at private equity group Unity Asset Management. “A handful of technology giants are expected to land on the mainland market very soon.”

About 30 “unicorns” – unlisted companies valued at more than US$1 billion – and Chinese internet giants that are already traded on equity markets abroad will be eligible for issuing CDR shares.

Top CSRC regulators including chairman Liu Shiyu said this month that Beijing would make new rules to facilitate the listing of large-cap technology companies such as smartphone maker Xiaomi and online payment platform Ant Financial on the Shanghai and Shenzhen stock exchanges.

These remarks echoed the Chinese leadership’s “techno-nationalist” push, which is encouraging new economy companies to raise capital in domestic markets and share their profits with mainland investors.

Most of China’s technology juggernauts have previously been funded by overseas venture capital and private equity funds while sporting the tag of variable interest entities.

The mainland exchanges were off-limits to the companies incorporated abroad because they were categorised as foreign businesses.

The gloves are off in Hong Kong’s fight with mainland exchanges for global fundraising crown

The pace at which approval was granted for this deregulatory plan has rarely been seen in China’s capital markets before
Cao Hua, partner, Unity Asset Management

The status of variable interest entities allows founders and investment funds to set up offshore vehicles that can sign contracts with mainland companies, giving the latter effective control of the resultant offshore vehicles.

The mainland’s three largest internet businesses – Alibaba Group Holding, which owns the South China Morning Post, Tencent Holdings and Baidu – are traded outside the mainland.

The guidelines on CDR take effect immediately.

The proceeds that companies net from CDR issuances can be transferred abroad, but the companies must be registered with the China Securities Depository and Clearing Corporation, according to the guidelines.

It is believed the regulators and exchanges have already convinced several tech juggernauts to float shares on the mainland, where valuations are higher than those in Hong Kong and New York.

Last week, a joint study issued by a Ministry of Science and Technology affiliate and a Beijing-based consultancy published a list of China’s 164 unicorns, which are worth a combined US$628.4 billion.

The top 30 unicorns can meet the CSRC’s requirements for valuations to issue CDR shares.

“Some of the companies previously planning to go public abroad will be lured to list on the mainland,” said Gong Zhenhua, a partner with Shanghai Ronghe Law Firm, which provides legal services to a clutch of start-ups. “It remains to be seen how fast the approval pace for the CDR issuances will be.”

Carlson Tong Ka-shing, the chairman of Hong Kong’s Securities and Futures Commission, said earlier that the stock exchanges of Shanghai and Shenzhen were not competitors for Hong Kong Exchanges and Clearing (HKEX).

Charles Li Xiaojia, the HKEX chief executive, also said last week that Hong Kong was aiming to compete with the US and not the mainland exchanges.