New Rules for Chinese Investors May Help Connected Device Maker Raise $10 Billion IPO

It is no secret that Chinese firms are slowing down investment overseas as the government’s capital control in an effort to curb speculative purchases and keep capital from flowing out of the country. However, the irony is many of the country’s biggest companies, such as Alibaba and Tencent are listed offshore and thus can actually not be purchased by many Chinese investors.

But as tech has grown ever more important to China’s economy, their absence from the stock market has become glaring. So, the government created what is called the Chinese Depositary Receipts, or CDRs. The new rules would allow these companies to come back to Mainland through the use of CDRs. The CDRs may not only transform the market caps of some foreign-listed Chinese companies, but also increase competition between New York Stock Exchange and Chinese stock exchanges in Hong Kong, Shanghai, and Shenzhen.

Modeled after the American Depositary Receipts, which were invented almost century ago, CDRs are a way for Chinese buyers to own offshore-listed companies’ shares in a way that fits within local securities regulations. According to China Banking News, the use of CDRs is expected to facilitate equity financing by tech companies “with a focus on sectors including big data, cloud computing, artificial intelligence, software, integrated circuits, high-end manufacturing and bio-tech.”

Beijing-based Xiaomi, a smartphone and connected device maker, is launching one of the most anticipated IPOs of the year in the Hong Kong Stock Exchange, with a target to raise $10 billion. Before the CDRs, the local institutional buyers would have no access to buy the stock. However, according to Reuters, Xiaomi could be one of the first companies to take advantage of the new CDR mechanism. The CDRs portion is likely to make thirty percent, or $3 billion, of its total fundraising size. The listing also would set a template for future CDR offerings and boost Xiaomi’s chance of meeting a $70 billion valuation target. Other tech firms planning such CDR issuance include U.S.-listed Alibaba, Tencent, Baidu, and JD.com.

According to BNY Mellon, the American Depositary Receipts has a market value of $2.9 trillion in 2016. Given China is quickly catching up to the U.S. economy, and China’s GDP has the potential to overtake the U.S. Level in 2029, the scale of CDR market could well surpass a trillion — let alone the fact Alibaba and Tencent have a combined market cap near a trillion dollars.

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