With the US making it harder for Chinese companies to access its capital markets, some of the firms seeking overseas financing are heading instead to Europe, where they don’t face the same regulatory hurdles. A recently expanded program between China and several European bourses has simplified the process, although issues such as lower liquidity remain. These listings involve something called GDRs, or global depository receipts, similar to the way shares of foreign companies are traded in New York indirectly through ADRs, or American depository receipts.
They are tradable securities representing shares in a foreign entity that, in this case, is listed in Shanghai or Shenzhen. The shares linked to the GDRs are segregated from the rest and deposited in the home country. Like ADRs, a GDR can equal underlying shares on a one-for-one basis, or it can represent a fraction of a share or multiple shares. GDRs can be sold through public offerings in a process that follows rules established by the destination exchange.
2. Why choose a GDR offering?
The US equities market, the world’s biggest, is becoming harder to tap for large Chinese firms due to increased regulatory and political scrutiny. About 200 Chinese companies listed in New York could be kicked out as early as 2024 because they don’t allow American regulators to verify their financial audits, as required by US law to help protect investors. Talks between US and Chinese authorities have failed to resolve the issue, and US lawmakers are considering a bill to bring the deadline forward to next year. (Some Chinese firms aren’t waiting: five state-owned giants in August announced plans to delist from the New York Stock Exchange.)
For one thing, there’s no such pressure regarding opening of audit books coming from European exchanges. In addition, there’s a system in place that makes cross-border listings easier for firms that are already listed in mainland China. The Shanghai-London Stock Connect was established in 2019 to link those two exchanges, and it was expanded in 2022 to include Shenzhen, Switzerland and Germany. (Hong Kong investors have been able to trade shares on the Shanghai and Shenzhen exchanges for years using similar ties.)
4. Can you just switch ADR to GDR?
No. Any locally-listed Chinese company that has ADRs would have to delist from the US and relist in another European venue, respecting the rules established by the host exchange. It cannot simply give a GDR in exchange for an ADR.
In general, liquidity in European markets is considerably lower than in the US, meaning there are fewer buyers and sellers to facilitate trading. That could be one factor keeping some Chinese issuers from listing in Europe. Since the start of the Stock Connect program with the UK, only two Chinese firms have taken advantage of it. Though wind-turbine maker Mingyang Smart Energy Group Ltd raised $757 million through a GDR sale in July -- more than the original plan -- trading in the weeks following was dismal. Low volume also plagued four Chinese firms that debuted July 28 in Zurich, after raising together the equivalent of $1.52 billion. That could improve, however, when they become fully fungible with shares listed in China, 120 days after the European debut. Based on Chinese regulations, that is the minimum holding period for Chinese GDRs.
Lawyers say the GDR process in Zurich is quicker, less complicated and cheaper than in London or Germany due to rules and requirements set up by the exchange. “If a company wants to raise funds, and there is a cheaper venue to raise the same amount, I guess they will pick the easier one and the cheaper one,” said Christina Lee, partner and co-head of Baker McKenzie’s Capital Markets Practice for Hong Kong and China. Jos Dijsselhof, the chief executive officer of the Swiss bourse Six Group AG, pointed to “the neutrality and the predictability of Switzerland being a country on its own,” not part of the European Union “or any other alliance” as an attractive factor for foreign firms. There are at least four more listings that could happen as soon as this year. Several Chinese brokers, including Citic Securities Co. and Haitong Securities Co., were said in August to be considering applying for licenses in Germany, which would enable them to offer some investment banking services across the EU. But as of mid-August no Chinese firm had issued GDRs in Frankfurt.
7. Are European companies heading to China?
The Chinese financial regulator said in July it was looking to encourage foreign firms to list in China as part of the Stock Connect program. Those backed by Chinese investors were said to be among the first potential candidates, with German forklift maker Kion Group AG one of those studying the possibility. Foreign companies listing there would issue CDRs, or Chinese depositary receipts.
8. What about Hong Kong for Chinese companies?
Some mainland-based firms are listing or relisting in the semi-autonomous city. Alibaba Group Holding Ltd., which is one of those targeted for potential delisting in New York, said in July it wanted to change its “secondary” listing status in Hong Kong to “primary.” That could make it easier to access mainland investors, but not necessarily foreign capital.
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