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China pins hopes on Swiss GDRs scheme to save international equity listings

When God closes a door, he opens a window.

Fourteen months after Beijing slammed a series of punitive measures on various industries, in response to Didi Chuxing’s defiant USD 4bn New York initial public offering, American listings have become a no-go for Chinese corporates.

A depressed IPO market in Hong Kong has made it even more difficult for Chinese companies seeking to raise funds from foreign investors.

Thankfully, the China-Switzerland Stock Connect offers some possible relief after springing to life in late July, allowing Chinese A-shares to list GDRs on the Swiss bourse.

So far, five Chinese companies have raised collectively USD 2.18bn from such offers, the best quarter for Chinese GDR sales ever, according to Dealogic data.

Investor enthusiasm toward Chinese GDRs is nowhere close to the hype surrounding many Chinese ADR listings. But the two offerings are very different financial tools to begin with to be fair.

American Depositary Receipts offerings are, by nature, stock IPOs in the US, while GDR offers are more akin to follow-ons by companies already listed in China, a hedge-fund investor said.

The GDR market, said Calvin Lai, a Partner at Freshfields Bruckhaus Deringer in Hong Kong, is starting modestly and that it is “too early to tell” how the China-Switzerland Stock Connect scheme would develop into a significant market.

“We have seen a very limited number of deals priced so far... after-market trading will determine how the GDR market will go from here,” Lai added. “Clearly it is not on the same scale as ADRs.”

Among recent issuers, lithium battery materials maker Ningbo Shanshan’s [SHA:600884] GDR price has been unchanged since a modest drop on its debut session late July, with paltry trading.

A source familiar with the company’s GDR offer said there were “political considerations” behind the deal given that Beijing is encouraging Chinese companies to tap the GDR market.

The company intended to raise between USD 200m-USD 400m from the GDR listing and settled for a USD 319m deal in the end.

There is some precedent for Chinese companies listing GDRs in Europe through the London-Shanghai Stock Connect Scheme.

The scheme got off to a flying start with four transactions and over USD 5.8bn of volume over 2019 and 2020, but has since come to a grinding halt, driven by low investor enthusiasm and political tensions between China and the UK.

The hedge-fund investor noted that he participated in a Chinese GDR listing in London “years back” but hasn’t touched any of the Swiss-listed Chinese GDRs.

“The concept is fine, especially if the company is likable and hedgeable,” he said. “But if it is not liquid, then you can’t (arbitrage) as you can’t short A-shares.”

Lai argued that while the Chinese GDR issuers are unlikely to be China’s largest tech names, the likes of Tencent or Alibaba, they will be “reputable” companies.

Lai and John C. Lee, vice chairman and the head of Greater China at UBS, said they are working on several GDR offers.

It’s hard to have a robust (GDR) pipeline as it is affected by the overall market conditions and macro environment, but it’s considered “healthy” and will likely be more active than Hong Kong IPOs for the remainder of 2022, said Lee.