Chinese ADRs vs GDRs is not the question
GlobalCapital, is part of the Delinian Group, DELINIAN (GLOBALCAPITAL) LIMITED, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 15236213
Copyright © DELINIAN (GLOBALCAPITAL) LIMITED and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
Asia

Chinese ADRs vs GDRs is not the question

Chinese tourists in Switzerland_alamy_22Mar22

Dangling the option of a Swiss listing for Chinese issuers won’t quite cut it

Is a new listing venue now available for Chinese firms that have seen their hopes of a US IPO dashed over the past year? If the recent announcements from four Mainland companies are any indication, Switzerland is the flavour of the month.

Four Chinese companies moved in unison last week to announce their respective plans to list on the Swiss exchange through the sale of global depositary receipts (GDRs). Two of them are already trading in Shanghai and the other two in Shenzhen.

China has seen GDR listings before. In 2018, Haier Smart Home Co floated GDRs in Frankfurt, sealing the first D-share IPO on the China Europe International Exchange, a joint venture board in Germany, set up in 2015 by Deutsche Börse, the Shanghai Stock Exchange and the China Financial Futures Exchange. A further four companies later went public in London through the Shanghai-London Stock Connect scheme, launched in June 2019.

The planned Swiss IPO announcements come just a month after China officially expanded the Shanghai-London Connect to cover markets in Shenzhen, Germany and Switzerland.

Perhaps more notably, they also come at a time when US-listed Chinese stocks — or American depositary receipts (ADRs) — have been under immense selling pressure.

While the ADR sell-off has eased after a series of attempts from Beijing to calm the market, the underlying concerns remain: that China and the US are yet to find a solution to the long-running dispute around accounting regulations, and that even if the problem is solved, the US could continue to clamp down on Mainland companies as the rise of China threatens its status as the global political and economic superpower.

Against that backdrop, a new wave of GDRs is undoubtedly a sentiment booster — showing that amid increasing hostility from the US, Chinese companies might have an overseas listing alternative in Europe. The SIX Swiss Exchange, the country’s main stock exchange, is home to some of the largest European listed firms by market capitalisation, such as Nestlé and Roche Holding.

The developments also serve to promote Beijing’s opening-up agenda, and reinforces a message the government has been trying to convey to the market: that overseas IPOs are not really being discouraged.

But while the prospect of a listing alternative in Europe is encouraging, the problems surrounding ADRs should still take priority. After all, time is still needed to see if the Swiss market, or the broader European equities market, can really be regarded as a feasible equity funding channel for Chinese firms.

No deals have materialised yet, so Chinese companies are yet to demonstrate that they indeed have access to the Swiss market.

It is also unclear to what extent the market can support firms’ funding needs and at what price. Neither has it been proven that there would be sufficient investor interest and strong reception to Mainland companies.

There is also a question about secondary liquidity, as the Swiss Exchange only accounts for just about 10% of Europe’s overall trading activity.

Having hosted five new listings — all of which were domestic — last year, the Swiss Exchange is yet to prove it has the depth and investor breadth to support not only secondary trading and liquidity but, more importantly, the potential primary listing needs of Chinese firms, as well as their ambitions of going global. (Chinese companies raised over $12.6bn through US IPOs last year and nearly $13bn in 2020, according to Dealogic.)

The firms gunning for a Swiss listing so far are leading private enterprises from the manufacturing sector — heavy equipment, medical equipment, and batteries for electric vehicles — which is an industry that China excels in, and is of strategic importance to the country.

Will the flurry of Swiss listings from China be just a flash in the pan, or will the bourse offer a sustainable long-term destination?

The data so far is less than encouraging. Only four companies have floated GDRs in London in the nearly three years after the Shanghai-London Connect went live; there has been no deal since October 2020.

This means that Beijing still needs to make it a top priority to solve the ADR dispute with the US as soon as possible.

While Hong Kong is quickly catching up, the US market — in particular the Nasdaq — is still the natural go-to choice for many Chinese companies, especially new economy firms. It is vital Mainland firms maintain access to the world’s two biggest stock exchanges.

A Swiss listing may serve as a stopgap, but whether it can satiate the needs of Chinese companies for very long remains a question. The clock is ticking.

Gift this article