China took a major step toward seeing Alibaba Group Holding Ltd, Baidu Inc and others list in its domestic market, announcing a trial program that would allow the technology giants to see their shares bought and sold in the world’s most populous country.
The State Council unveiled the plans on Friday, less than a month after the idea was first made public — a surprising move that underscores how keen authorities are to see foreign-listed Chinese companies come home. A pilot of so-called Chinese depositary receipts would apply to companies that went public overseas and have a market value of more than 200 billion yuan ($32 billion). The new system will allow firms to use corporate structures that aren’t permitted on the mainland, and monies raised can be moved offshore. Some private companies will also find it easier to come to market.
While China has been a breeding ground for some of the world’s fastest-growing and highest valued tech businesses, companies such as e-commerce giant Alibaba and search engine firm Baidu have headed offshore, leaving the local market reliant on state-run industries for large new listings. The country’s touchiness about stocks with high valuations or no track record of profits is a deterrent for tech firms, as is the ban on structures such as dual-class shares.
“There’s a strong desire to see local champions, these technology companies, come back onshore -- and CDRs is one way of doing this,” said David Smith, Asia head of corporate governance at Aberdeen Standard Investments.
Regulators first mooted the prospect of a CDR program at last month’s meeting of China’s rubber-stamp national legislature. The State Council didn’t say in the statement when the trial program would start.
The news could have global implications. While the likes of Alibaba and Tencent Holdings Ltd. have headed to New York and Hong Kong, respectively, the prospect of at least a secondary listing in the world’s second-biggest equity market could significantly boost their valuations and set an example for other companies.
Hong Kong Exchanges & Clearing Ltd. stock suffered its worst month in more than a year in March, partly due to the increased threat from exchanges in Shanghai and Shenzhen.
“High-tech and other innovative enterprises may, in light of the new CDR regime and ongoing competition between onshore and offshore equity exchanges, be reconsidering their IPO plans,” said John Xu, a Shanghai-based at the law firm Linklaters LLP. For example, a dual listing in China and an offshore market may now be realistic, he said.
“With the new CDR market as an additional source of finance, it may no longer be necessary to unwind existing VIE structures, or restructure shares into the same class, for the purpose of an onshore listing,” said Xu.
Variable interest entity structures have been used by many of China’s tech entrepreneurs to set up their companies, but they’re forbidden in mainland markets. By waiving the ban on VIEs, as well as share classes that have different voting rights to give founders more control, CDRs may be establishing new norms, said Aberdeen’s Smith.
“If these VIE companies are available onshore, what does that mean for the structure?” he said. “While we won’t know for sure, it would seem to be one step closer to normalization, and this is something investors are watching closely.”
The plans released on Friday say that if VIE and dual-class structures are used, that information should feature prominently in company prospectuses. The securities regulators should consult with other agencies and handle applications from VIEs “prudently, based on varying circumstances.”
While no companies have said they will take part in the trial, the chiefs of several firms have previously expressed interest. Zhou Haibin, an analyst at Essence Securities, identified six foreign-listed companies that meet the plan’s thresholds: Alibaba, Baidu, JD.com Inc., NetEase Inc. -- which are all in New York -- and Hong Kong-listed China Mobile Ltd. and China Telecom Corp.
Private companies valued at more than 20 billion yuan and with revenue of 3 billion yuan or more in the past year will also be eligible for the program, the statement said, along with fast-growing unlisted companies that work in the field of advanced technology and have a leading advantage in their sector. In these cases, local rules -- for example bans on weighted voted rights -- will apply, though the statement suggested the CSRC has some flexibility to waive restrictions on VIEs.