The Strategist

China sets to return hi-tech giants back in the country

04/03/2018 - 10:16

State Council of the People's Republic of China promulgated a pilot project that provides for the sale of shares and depositary receipts of major Chinese technology companies located on foreign exchanges. This scheme is supposed to return these companies to China and ensure that Chinese shareholders benefit from such a return.

ChrisYunker  via flickr
ChrisYunker via flickr
Many technology companies have been established in China in recent years. Some of them are among the largest and most rapidly developing in the world. However, part of the firms had to leave China: first, to access large international markets and institutional investors, and secondly, because the forms used by them, for example, variable share participation or different classes of shares, are not allowed by Chinese regulators. So, Alibaba Group, Baidu, Tencent Holdings and other companies prefer to be located in New York or Hong Kong. The new pilot scheme, promulgated by the State Council of China, will allow the sale of shares and depositary receipts (Chinese depositary receipts, CDRs) of these companies in China.

The project will affect large Chinese companies that are located abroad, and whose market value is at least 200 billion yuan ($ 32 billion). The benefit for them is that, while maintaining their structure and form of doing banned in China business, the companies will be able to raise funds in the market of the most populous country in the world. The borrowed funds can be exported abroad.

In addition, private companies, whose value exceeds 20 billion yuan ($ 3.2 billion), and revenues of at least 3 billion yuan ($ 478 million), can participate in the project too. According to estimates by China International Capital (CICC), published by Bloomberg, the criteria for the pilot project include 35 companies, both private and those whose shares are quoted abroad.

So far, none of the potential returnees commented on the draft State Council of China. However, analysts are positive about it. "There is a strong desire to see local leaders, these technology companies, back in the country, and CDR is one of the forms by which this can be achieved," David Smith, head of corporate management at Aberdeen Standard Investments, told Bloomberg. "In the light of the new regime with CDR and against the backdrop of continued competition between Chinese and foreign stock exchanges, high-tech and other innovative companies may reconsider their plans for an IPO," believes expert of the law firm Linklaters LLC John Xu, adding that the possibility of double placement - in China and abroad - will now be realistic.