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Small is big for China tech IPOs

Digital China_230px
By Jonathan Breen
21 Mar 2018

China’s regulators have floated the idea of using Chinese Depository Receipts (CDR) to attract the mainland’s new economy giants to list on the home market — a big step in the right direction if China wants to win the returning business of its foreign listed technology firms. But with rules around the issuance still in the works, focusing on small names may reap big rewards.

The possibility of CDRs, which have been under discussion for many years, re-emerged this month when an official at the China Securities Regulatory Commission reportedly said that CDRs will be launched soon.

Simply put, a CDR will be a financial instrument that represents a certain amount of a company’s offshore-listed stock, allowing domestic Chinese investors to hold overseas shares. They will be listed on a Chinese exchange and then be openly tradeable as if trading the underlying stock.

China’s intention with rebooting the idea of CDRs is clear: provide big Chinese tech companies with a fast track home to help boost its new economy segment.

The initiative is long overdue. But while China attempts to bring its tech stars home, there is a stream of new economy companies leaving for the West. By the end of the March, five companies will have listed on US exchanges this year alone. Mainland video streaming platforms iQiyi and Bilibili are in the market this week with potential $2.4bn and $525m IPOs on Nasdaq, respectively.

Granted, China wants to focus on the giants because it wants to open up its new economy stock market with a bang. But of the companies heading for US listings, while many are small, some are also medium-sized and a handful large. They could very well be the Baidus, Alibabas, Tencents and JD.coms of the future.

If China is committed to attracting offshore-listed tech companies back to its home market, it needs to set its sights not just on the big names but also on the young guns of the sector. The competition is already intense.

The Hong Kong Stock Exchange (HKEX) is on the verge of implementing a new secondary listing regime that makes dual-listings easier — a move that will be attractive for new economy companies already listed in the US and UK, according to a blog post by HKEX chief executive Charles Li. The new regime also gives offshore-listed companies with dual-class share structures the same treatment for secondary flotation in Hong Kong. In addition, the exchange put the icing on the cake with its recent approval of weighted voting rights for new IPOs on the bourse.

While there have been some seemingly nationalistic public commitments and expressions of support from tech majors to return, the decision on where to list will ultimately come down to basic business. The market is keenly awaiting the release of CDR regulations, so the key to China’s success will be in the detail.

The trading volumes in China are far higher than in Hong Kong, providing a natural pool of capital for firms considering a Mainland listing. China should capitalise on that advantage. Apart from the return of its new economy companies, China could also benefit from wooing international companies for which a CDR listing would be a no-brainer, primarily those with a China-centric business. For example, Taiwan-based Foxconn Technology Group, an electronics manufacturer, has its largest factories on the Mainland. Its local arm won listing approval from the Chinese market regulator this month. And depending on the equity structure it is after, the company could list A-shares or it could wait to float CDRs once the guidelines are out.

China should work towards pushing out its rules on CDRs sooner rather than later. And unlike its typical slow-and-steady approach, it can find more success if it lays out its rules clearly, tackling everything from the basics of how CDRs in China would work, to capital controls, market capitalisation and corporate governance requirements.

More importantly, it should cast a wide enough net to woo back the big and the small tech names. Only then will it have a real competitive advantage. 

By Jonathan Breen
21 Mar 2018