China set to attract more red stocks to mainland markets
China’s securities regulator has widened the path for more overseas-traded Chinese companies to sell shares in mainland markets as part of a government campaign to expand capital markets and support innovative companies.
The China Securities Regulatory Commission (CSRC) on Friday expanded a 2018 pilot program allowing blue-chip companies to conduct domestic listings. Red Chips are mainland-based Chinese companies incorporated internationally and traded in offshore markets, primarily in Hong Kong. The expanded trial will include more industries such as next-generation information technology, new materials, new energy vehicles, green environmental technologies, marine equipment and companies of national strategic importance.
The program, intended to induce overseas listed Chinese companies to raise capital in domestic markets, was previously limited to companies involved in the Internet, big data, cloud computing, artificial intelligence, software and integrated circuits, the manufacturing high-end equipment and biotechnology.
The expansion aims to improve China’s capital market, support high-quality red chips for trade in domestic markets, and promote the development of China’s new technologies and strategic industries, the CSRC said.
The 2018 pilot program offered a new option for microchip companies through the issuance of Chinese Certificates of Deposit (CDRs). Modeled after American Depositary Receipts, CDRs allow companies listed abroad to bypass barriers to listing on A-share markets, such as restrictions on weighted voting rights – which tech and family companies favor for maintain control – and demands for profitability.
In May 2020, China lowered the threshold for red-chip companies to help attract stocks to domestic markets. Under the new rules, high value-added companies can offer shares on the continent either as CDRs or through direct sales of A shares.
A capital markets lawyer said the expansion provides additional political support for more Chinese companies traded abroad to tap into the domestic capital market.
China Resources Microelectronics Ltd., the largest integrated device maker in China and a unit of Chinese state conglomerate China Resources Holdings Co. Ltd., became the first red chip company to issue A-shares on the mainland in February 2020, selling on the Nasdaq type STAR marketplace.
Several large red-chip companies, including the main computer maker Lenovo Group Ltd. and state telecom operator China Mobile Ltd., this year also unveiled plans targeting sales of national shares, either through direct sales of shares or through the issuance of CDRs.
There are now three options for companies with high potential to sell stocks nationally. The first is to inject part of their Hong Kong-traded business into special purpose vehicles registered on the mainland. The second is through the issuance of CDRs, which allow red-chip issuers to keep their governance structures, financial information and audits unchanged. The last is the direct sale of A shares made possible by the launch of a listing regime based on listing on the STAR Market. But companies must adapt to national company law and listing requirements.
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