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Treasury & Capital Markets
US curbs burnish allure of European stock markets for Chinese firms
More A-share companies issuing global depositary receipts but liquidity remains a challenge
Yuki Li 9 Dec 2022

An intensifying clampdown in the United States has raised the profile of Switzerland as a destination for Chinese companies seeking international capital in a volatile market environment.

A total of eight Chinese companies have raised more than US$2.5 billion via the listing of global depositary receipts (GDR) on the SIX Swiss Exchange (SIX) in the second half of 2022.

This came after the China Securities Regulatory Commission and the Swiss Federal Department of Finance on July 28 jointly launched the China-Switzerland Stock Connect, enabling Chinese companies to access the Swiss capital market, and vice versa.

On the same day, four Chinese A-share companies, including battery manufacturers Ningbo Shanshan and Gotion High-tech, electronic waste recycling enterprise GEM, and building materials maker Keda Industrial Group, debuted on the SIX market.

They were followed by the GDR listings of Chinese healthcare firms Lepu Medical Technology and Joincare Pharmaceutical in September, which raised US$224 million and US$92 million respectively.

Shenzhen-listed Sunwoda Electronic and Hangzhou GreatStar Industrial also listed their own GDRs in November, raising US$440 million and US$154.5 million respectively.

Tightening US restrictions

The growing trend of GDR issuance by Chinese companies on SIX is largely driven by rising US-China tensions in recent years.

In August, five Chinese state-owned enterprises – China Life Insurance Company, PetroChina Company Limited, China Petroleum & Chemical Corporation, Aluminum Corporation of China Limited, and Sinopec Shanghai Petrochemical Company Limited – indicated that they would delist their American depositary receipts from the New York Stock Exchange.

They were among the eight Chinese SOEs that have refused to disclose specific data for review by the US Public Company Accounting Oversight Board (PCAOB) on the grounds of national security, according to the US think tank Atlantic Council.

Other US-listed Chinese companies are also facing delisting if they fail to submit the reports to be audited by the PCAOB by the 2024 deadline as required under the Holding Foreign Companies Act of 2020.

Amid the tightening US regulatory restrictions, an increasing number of Chinese companies are looking to issuing GDRs in Europe for offshore fund raising.

SIX Swiss Exchange, for example, accepts China’s Accounting Standard for Business Enterprises (ASBE), which is easier for Chinese companies to comply with.

The European markets also offer a faster listing process for Chinese enterprises. “It takes up to nine months to one year for a share offering in Hong Kong, while it only takes two to three months for a GDR offering in Europe, which is a quite reasonable timetable at the moment,” observes a Hong Kong-based banker from a top international bank.

Besides, the Hong Kong stock market has been performing poorly over the past 12 months, and its IPO market is virtually shut down, he adds.

European alternative

As such, the European GDR market offers a better choice for A-share companies seeking to foreign capital, aside from the fact that it is easier for them to get the approval of Chinese regulators as the scheme aligns with government policy.

The GDR system was launched by the Shanghai and London stock exchanges in 2019. It was a ground-breaking initiative to boost cross-border investments between the two markets, and was later extended to firms listed in Switzerland, Germany, and Shenzhen.

Huatai Securities is the first Chinese company to list on the London Stock Exchange in 2019. Three Chinese companies followed between 2019 and 2020, namely China Pacific Insurance, China Yangtze Power, and SDIC Power.

The GDR listings in London and Switzerland pave the way for similar Chinese issuances in Germany, which has yet to list any Chinese companies.

"We are now technically ready to launch the China-Germany Stock Connect and are happy to welcome A-share companies to issue [GDRs] in Germany," Niels Tomm, a representative of the Deutsche Börse, said at the recent Shanghai Global Asset Management Forum.

Despite the prospects of raising funds in European markets, it is hard for Chinese firms to find local European asset managers or investors to invest in their GDRs since they don’t have much exposure to European business. Chinese SOEs end up supporting GDR names.

Moreover, the London, Swiss, and German stock exchanges are smaller when compared to the market caps of the Hong Kong and US markets.

While the European GDR scheme can serve as a buffer for Chinese companies navigating a turbulent market environment, it still has a long way to go to be a truly vibrant alternative to the US and Hong Kong markets because of its limited liquidity.

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Nicole Lim
Nicole Lim
investment analyst - ESG, fixed income
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