China should use its second chance on CDRs

A long-touted equity link between London and Shanghai is set for take-off by the end of the year, but the most unsurprising news to emerge is HSBC’s plan to use it for a Mainland listing. China now has an excellent chance to get its act together on Chinese Depositary Receipts.

  • By John Loh
  • 25 Oct 2018
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If HSBC’s proposal materialises, it would be the first UK firm to take advantage of the two-way depositary receipt issuing mechanism under the London-Shanghai Stock Connect.

An onshore listing in China is nothing new to HSBC. The bank has sought to list there since at least 2001. Then in 2009, the move looked like it might go ahead as HSBC hired underwriters for its debut on the highly-publicised planned international board in Shanghai. But again, nothing came of it.

Last week, the bank revealed it was studying the proposed framework for floating Chinese Depositary Receipts (CDRs) under the Shanghai-London scheme, but refused to offer further details.

Beyond the obvious publicity this move will bring HSBC, it could be a game changer for China and its long-stalled CDR programme — if the Chinese regulators play their cards right this time.

China’s last attempt at CDRs did not go well, and the regulators only had themselves to blame. The scheme is a state-backed project meant to enable the country’s overseas-traded technology giants —arguably the Mainland’s most successful companies — to list at home.  

Earlier this year, Xiaomi had been eyeing a dual landmark IPO in Hong Kong and in the Mainland through CDRs, with the Chinese electronics company hoping to raise about half of its $10bn target onshore. But its wings got clipped when the China Securities Regulatory Commission (CSRC) clashed with Xiaomi on valuations, forcing the firm to drop the CDR portion.

The authorities made things worse when Xiaomi starting trading. The stock immediately became eligible for trading by onshore investors through the Stock Connect scheme that links Hong Kong with the Mainland, but, in a suspiciously timed move, the Shanghai and Shenzhen exchanges shut this down by declaring that any foreign stapled or dual-class shares were off-limits.

The move seemed aimed squarely at closing off all available avenues to Xiaomi, taking even the Hong Kong Stock Exchange by surprise.


CDR 2.0?

Now HSBC may be on the cusp of reviving CDRs, with market watchers expecting a listing by the end of the year through the new UK-China link. But before that, the scheme will host an outbound Global Depositary Receipt (GDR) offering in London from Huatai Securities, the Chinese brokerage that has announced a $500m primary capital increase.

Most of the attention on London’s link and Europe’s link, the China Europe International Exchange (Ceinex) in Frankfurt, has focused on the outbound angle of Chinese issuers selling shares overseas. For instance, Qingdao Haier just sealed the first D-share IPO on Ceinex, raising €278m from European funds and Chinese government-backed funds.

But the China inbound opportunity is just as vital, as the country opens up its markets to the rest of the world. Letting foreign issuers sell stock in the Mainland sends all the right signals about reform, in addition to giving Chinese investors more options and helps regulators stem the tide of capital outflows.

Of course, the platform needs to host more than two financial issuers to be a success.

Huatai and HSBC are the safe choices to get the London-Shanghai Stock Connect off the ground, but follow-up action from blue-chip corporations, which had been touted as the early targets for the scheme, is necessary. There is no shortage of candidates, with Chinese search engine Baidu, Alibaba Group Holding and Tencent Holdings having indicated interest in CDRs.

The Xiaomi episode is the past. But China can make up for lost time by smoothing the way for HSBC or other maiden CDR issuers. Then the rest will follow.

  • By John Loh
  • 25 Oct 2018

Panda Bonds Top Arrangers

Rank Arranger Share % by Volume
1 Bank of China (BOC) 27.09
2 Industrial and Commercial Bank of China (ICBC) 12.86
3 China Merchants Bank Co 11.85
4 China Merchants Securities Co 9.09
5 Agricultural Bank of China (ABC) 5.51

Bookrunners of Asia-Pac (ex-Japan) ECM

Rank Lead Manager Amount $b No of issues Share %
  • Last updated
  • Today
1 CITIC Securities 15.74 76 7.79%
2 Goldman Sachs 14.46 60 7.16%
3 China International Capital Corp Ltd 14.21 72 7.03%
4 UBS 12.70 89 6.28%
5 Morgan Stanley 11.11 66 5.50%

Bookrunners of Asia Pacific (ex-Japan) G3 DCM

Rank Lead Manager Amount $b No of issues Share %
  • Last updated
  • Today
1 HSBC 32.35 286 8.25%
2 Citi 25.59 178 6.53%
3 JPMorgan 18.14 134 4.63%
4 Standard Chartered Bank 18.08 182 4.61%
5 Bank of America Merrill Lynch 15.32 112 3.91%

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