Beijing has ramped up efforts to attract foreign-funded mainland tech firms to list on domestic stock exchanges by giving the go-ahead to the ChiNext market in Shenzhen for Chinese depositary receipts (CDRs).
The move comes ahead of President Xi Jinping’s visit to Shenzhen on Wednesday to mark the 40th anniversary of the establishment of the special economic zone.
In the guideline issued on Sunday, Beijing said the launch of the CDR programme would be among the major financial reforms to reinforce the city’s development.
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“The investing public does expect a flurry of solid companies to raise funds via the depositary receipt system,” said Ivan Li, a money manager at Shanghai-based Loyal Wealth Management. “The document to encourage CDR issuance on the ChiNext market in Shenzhen is a good sign for investors.”
The move to liberalise ChiNext comes after the securities regulator on September 22 gave Segway-Ninebot, an electric-scooter maker, the nod to float on the tech-heavy Star Market in Shanghai, making it the first company to issue CDRs. Segway-Ninebot, which is expected to raise 2 billion yuan (US$296 million) by floating 70 million CDRs, is yet to issue the CDRs.
CDRs are the equivalent of US-listed American depository receipts. In July last year, China embarked on the CDR mechanism to attract foreign-funded Chinese tech firms on the Star Market. The system facilitates companies with variable interest entity (VIE) structures to float shares on the mainland.
Before the launch of the Star Market, foreign-funded mainland companies, particularly in the tech sector, were barred from listing shares on the Shanghai and Shenzhen stock exchanges.
Typically, the founders and foreign venture capital funds set up an offshore vehicle, or VIE, which then sign contracts with the Chinese firms via one or more foreign investment subsidiaries in China, giving effective control of the Chinese firms to the offshore vehicles.
Over the past two decades, hundreds of Chinese firms have used VIE structures to launch IPOs outside the mainland.
The Star Market, aimed to bolster China’s technological innovations amid worsening US-China relations, will allow VIE firms to issue CDRs to raise capital.
Analysts said at that time Beijing would initially take a cautious stance in approving CDRs because a clutch of technical issues needed to be ironed out.
The securities regulator announced plans to expand reform measures on the Star Market, including the introduction of CDRs to the ChiNext board early this year.
Analysts said the introduction of the CDR scheme to the ChiNext market will boost Shenzhen’s stature.
Nicholas Kwan, director of research at Hong Kong Trade Development Council, said the announcement of the CDR programme ahead of President Xi’s visit to Shenzhen on Wednesday, reflects Beijing’s determination to develop Shenzhen as a major financial centre in the bay area.
Kelvin Lau, senior economist for Greater China at Standard Chartered. said the launch of the CDR programme in Shenzhen will enhance the special economic zone’s role as a fundraising hub for start-ups.
Lau added that the launch of CDRs in Shenzhen will not pose a threat to Hong Kong’s standing as a fundraising centre.
“As the stock connect scheme has already linked up the two markets, listings in Shenzhen under the CDR programme will allow more international investors to invest in Shenzhen via Hong Kong,” he said.
More from South China Morning Post:
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- Beijing fast tracks foreign-listed Chinese tech firms’ A-share flotation with CDR system launch
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