How and why Chinese companies are listed in Europe now


With the United States making it more difficult for Chinese companies to access its capital markets, some of the companies seeking foreign funding are instead heading to Europe, where they don’t face the same regulatory hurdles. A recently expanded program between China and several European exchanges has simplified the process, although issues such as declining liquidity remain. These listings involve something called GDRs, or Global Certificates of Deposit, in the same way that shares of foreign companies are indirectly traded in New York through ADRs or US Certificates of Deposit.

These are marketable securities representing shares of a foreign entity which, in this case, is listed in Shanghai or Shenzhen. Actions linked to GDRs are separated from the rest and deposited in the country of origin. Like ADRs, a GDR can equal underlying shares on a one-to-one basis, or it can represent a fractional share or multiple shares. GDRs can be sold through public offerings in a process that follows the rules established by the destination exchange.

2. Why choose a GDR offer?

The US stock market, the largest in the world, is becoming increasingly difficult for large Chinese companies to operate due to increased regulatory and political scrutiny. About 200 Chinese companies listed in New York could face eviction as soon as 2024 because they do not allow US regulators to verify their financial audits, as required by US law to help protect investors. Talks between US and Chinese officials have failed to resolve the issue, and US lawmakers are considering a bill to extend the deadline until next year. (Some Chinese companies aren’t waiting: Five public giants in August announced their intention to delist from the New York Stock Exchange.)

On the one hand, there is no such pressure regarding the opening of audit books from European stock exchanges. Additionally, there is a system in place that facilitates cross-border listings for companies already listed in mainland China. The Shanghai-London Stock Connect was established in 2019 to link these two stock exchanges, and it was expanded in 2022 to include Shenzhen, Switzerland and Germany. (Hong Kong investors have been able to trade stocks on the Shanghai and Shenzhen stock exchanges for years using similar links.)

4. Can you just switch from ADR to GDR?

No. Any locally listed Chinese company that has ADRs should de-list in the United States and re-list in another European location, following the rules established by the host exchange. He cannot simply give a GDR in exchange for an ADR.

In general, liquidity in European markets is considerably lower than in the United States, which means there are fewer buyers and sellers to facilitate trading. This could be a factor preventing some Chinese issuers from listing in Europe. Since the launch of the Stock Connect program with the UK, only two Chinese companies have taken advantage of it. Although wind turbine maker Mingyang Smart Energy Group Ltd raised $757 million from a sale in the GDR in July – more than originally planned – trading in the following weeks was dismal. Low volume also plagued four Chinese companies which debuted on July 28 in Zurich, after raising the equivalent of $1.52 billion together. That may improve, however, when they become fully fungible with Chinese-listed stocks, 120 days after the European debut. According to Chinese regulations, this is the minimum holding period for Chinese GDRs.

6. Why is Switzerland ahead?

Lawyers say the GDR process in Zurich is faster, less complicated and cheaper than in London or Germany due to the rules and requirements put in place by the stock exchange. “If a company wants to raise funds and there is a cheaper way to raise the same amount, I suspect they will choose the easiest and cheapest way,” said Christina Lee, partner and co-lead of the practice of Baker McKenzie Capital Markets. for Hong Kong and China. Jos Dijsselhof, managing director of the Swiss stock exchange Six Group AG, pointed out that “the neutrality and predictability of Switzerland being a country in its own right”, not being 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 early as this year. Several Chinese brokers, including Citic Securities Co. and Haitong Securities Co., reportedly considered in August applying for licenses in Germany that would allow them to offer certain investment banking services across the EU. But as of mid-August, no Chinese company had issued GDRs in Frankfurt.

7. Are European companies heading to China?

China’s financial regulator said in July it was seeking to encourage foreign companies to register in China under the Stock Connect program. Those backed by Chinese investors would be among the earliest potential candidates, with German forklift maker Kion Group AG being one of those exploring the possibility. Foreign companies listed there would issue CDRs or Chinese Certificates of Deposit.

8. What about Hong Kong for Chinese companies?

Some mainland-based businesses are registering or re-registering in the semi-autonomous city. Alibaba Group Holding Ltd., which is one of those targeted for possible delisting in New York, said in July that it wanted to change its listing status from “secondary” in Hong Kong to “primary”. This could facilitate access to continental investors, but not necessarily to foreign capital.

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