Chinese GDRs in Europe boost capital

Investments spur further opening-up, facilitate local firms' outbound reach

Chinese companies' accelerated pace in issuing global depositary receipts in major European markets over the past few months will facilitate their outbound reach and the ongoing opening up of the Chinese capital market, industry insiders and experts said on Monday.

Shanghai-listed Joincare Pharmaceutical Group Industry Co Ltd announced on Thursday that it has been granted conditional approval to issue GDRs on the SIX Swiss Exchange.

A week prior to that, Shanghai-listed Eastroc Beverage was reported to have issued $500 million worth of GDRs on the Swiss exchange with the help of China International Capital Corp Ltd and Goldman Sachs.

As of Monday, some nine A-share companies have announced GDR plans in Switzerland, including industry leaders such as Sany Heavy Industry and electric vehicle cell maker Gotion High-tech.

Globally, GDRs refer to a certificate, issued by a depositary bank, representing shares in a foreign stock on two or more global markets. GDRs in China stand for the certificates of A-share stocks traded in overseas markets, denominated in yuan.

As calculated by CICC, at least 13 A-share companies have announced or started their GDRs on the London Stock Exchange or the Swiss exchange so far this year.

A-share companies' increasing interest in issuing GDRs on European bourses is linked to benefits that can be derived from the amended GDR management regulations. The regulations, under China's stock connect programs, were released by the China Securities Regulatory Commission in February.

Under the latest amendments, A-share companies listed on the Shenzhen Stock Exchange can apply to issue GDRs on the designated exchanges. In the past, only Shanghai-listed companies were allowed to file such applications. Meanwhile, Switzerland and Germany have been included in the stock connect mechanism. Prior to that, the London bourse was the only option for GDR issuances in Europe.

This has shown Chinese regulators' resolve to advance two-way opening-up in China's capital market and their support for Chinese companies' floats on overseas markets, unaffected by the uncertainties in the global market, experts from CITIC Securities wrote to their clients.

Information in the public domain showed that all the 13 GDR issuers this year are from the manufacturing sector. Sun Lijun, co-head of global banking at UBS Securities, said the Swiss exchange is more attractive than other options to companies with GDR plans since it offers a higher price-to-earnings ratio in general, which means higher valuations.

A-share companies can tap strategic investors from home and abroad via GDRs, which can make their businesses more international, diversify their ownership structure and improve corporate governance, Sun said.

On April 7, Shanghai-listed machinery company Keda Industrial Group Co Ltd announced it will cancel its planned private placement valued at over 2 billion yuan ($293 million) and instead go in for a GDR issue on the Swiss bourse.

At a news conference on July 28, Li Yuejin, Keda's board secretary, said the GDR proceeds will be used to upgrade the company's industrial chain, and invest in overseas projects and innovation. While Europe will be Keda's next focus in terms of its global expansion strategy, GDRs will help Keda to localize its business in overseas markets, he said.

No GDR applications by Chinese companies have been reported in Germany so far this year, mainly due to the lack of detailed regulations for GDR issues in the German stock market.

But the Frankfurt Stock Exchange can offer a liquid, transparent, efficient and reliable market to Chinese corporates seeking funds for business expansion in Europe. They can thus reach the European investor base, said Katrin Otto, head of China market development at Deutsche Boerse Group, which operates the exchange.