Ceinex, Deutsche Börse’s joint venture with the Shanghai Stock Exchange and the China Financial Futures Exchange, plans to launch a market in German-listed shares of Chinese companies in 2017, with the first issue planned for the second quarter, and potentially more than 10 listings in the first year. The market is supposed to support Chinese firms funding foreign acquisitions with new equities.
The “D-shares” will be documented in English, listed in Frankfurt and, crucially, match up to German standards of disclosure and transparency — a feature which has slowed down some previous attempts to encourage more Chinese firms to raise equity offshore.
However, they will be governed by Chinese company law. Both German and Chinese regulators will have to approve listings. The share class will support various listing types, according to Deutsche Börse, such as initial public offerings in Frankfurt alone and dual-class simultaneous issuance of A-shares (China-listed onshore RMB) and the new D-shares.
Ceinex is working on a feasibility study for the scheme at the moment, but the results are encouraging, according to sources within Deutsche Börse.
This year has seen the largest ever Chinese outbound acquisition, the $43bn bid for Syngenta from ChemChina.But the financing for the deal illustrates why issues of disclosure and security are so crucial. Initially, the deal was structured with an international section, secured by the Syngenta part of the business, and non-recourse to ChemChina, with a China-focused loan alongside it.
At first, international lenders focused their attention on the European non-recourse financing, though many eventually came into Asian syndication as well — but later, on with more intensive credit work.
CAPITAL CONTROLS
Most important to the development of the market is how far China continues easing its capital controls.
In theory, firms are permitted to take funds out of China to pursue foreign acquisitions — it’s only investors who are restricted in deploying their capital — but this needs to be approved by foreign exchange regulators, adding another hurdle in arranging finance and bidding for companies.
In practice, this means only the largest firms have ready access to large volumes of foreign exchange, or the kind of banking group that ChemChina has assembled.
Ceinex is therefore targeting mid-sized firms, rather than ChemChina-style megadeals, and plans to source listings through the existing networks and reputation of Deutsche Börse’s joint venture partners the Shanghai Stock Exchange and China Financial Futures Exchange. The project also has the support of the Chinese government.
According to Deutsche Börse, there are already 180 “China co-operation products” trading in Frankfurt, though the D-shares have yet to launch. These are 145 China-related bonds and 35 China-related ETFS already listed.
Although the project is launching soon, if China’s liberalisation of its capital account proceeds faster than expected, this could also scupper the project — there’s no need to raise offshore equity if it’s easy to take funds out of the country.