Pilot program aims to woo tech unicorns

New option to allow firms listed overseas to trade in home market

Leading Chinese mainland’s technology giants’ hopes of listing in the domestic market received a boost on Friday as regulators announced a pilot program to support innovative companies’ issuance of China Depositary Receipts.

According to the document from the China Securities Regulatory Commission, overseas listed Chinese mainland companies in the hightech and strategic emerging industries such as the internet, high-end equipment manufacturing and biological medicine, are allowed to issue CDRs in the domestic market.

This program is expected to apply to companies with a total market value of more than 200 billion yuan ($32 billion). According to Chinese business magazine Caixin, the first companies eligible for the program include Baidu, Alibaba, Tencent, JD, Ctrip, Weibo, NetEast and Sunny Optical Technology Group.

A depositary receipt is a type of negotiable financial security that is traded on a local stock exchange but represents a security — usually in the form of equity — that is issued by a foreign listed company. A number of Chinese companies such as Baidu and Alibaba have listed in the United States via American depositary receipts, as only companies registered in the US can directly issue stocks in the country.

Prior to the new policy, overseas listed Chinese companies had to resort to privatization or dismantling of the variable interest entity structure to come back to the A-share market, which is quite time-consuming.

It is less than a month since the idea was first introduced to the public. Premier Li Keqiang said, during the delivery of the Government Work Report in early March, that the government would support qualified innovative companies to go public and seek financing. Wang Jianjun, general manager of the Shenzhen Stock Exchange, said during the two sessions last month that they were studying the possibility of opening a green channel for unicorn companies to be listed here.

As Cheng Shi, chief economist with ICBC International, explained, the favorable policies for the listings of tech unicorns in the A-share market will help boost the development of the “new economy” in China, which will be a powerful engine of the country’s high-quality growth.

“It will help accelerate the return of overseas-listed tech unicorns to the home market, which will enable them to gain ample domestic capital to support their business development,” Cheng said.

The market responded positively to the swift progress. Public companies from the instruments, electronic devices, software and communication networks sectors reported robust growth of more than 1.29 percent in general on Monday, while the benchmark Shanghai Composite Index dropped 0.18 percent and the Shenzhen Component Index was down 0.14 percent.

Dong Dengxin, a finance professor at the Wuhan University of Science and Technology, said the latest move by the regulators has brought three major changes to the Chinese IPO market: less emphasis on profitability and asset scale, allowing lossmaking firms to launch IPOs and introducing the mechanism of CDR as an alternative fundraising channel for companies.

“The introduction of CDRs removes the hurdles for overseas-listed companies to float shares in the domestic market and it will finally allow domestic investors to enjoy the benefits of the rapid development of the technology firms,” Dong said.