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The Swiss Spot – Hong Kong and China bankers pinning hopes on revival of GDRs for final months of 2023

With barely one-third of the year left, investment bankers returning from Bali, Tokyo or Bangkok where they spent quality family times are now confronted with a brutal reality. 

Investment banking fees from China fell 23.9% this year to date to USD 4.56bn, even after they have left no stone unturned exploring all corners of dealmaking opportunities. Chinese initial public offerings at home, including listings on Shanghai, Shenzhen and Beijing, have fallen 23.7% in value to USD 43.54bn a year earlier, while Hong Kong's have plummeted 65% to USD 2.67bn in the same period. 

US listings? Forget it. 

That leaves them with literally one and only option – Europe – for the rest of the year. 

They are hoping for a revival of Chinese global depository receipt (GDR) offerings in the fourth quarter, bankers told this news service.

“GDRs offer the chance to make a quick buck, thanks to their relatively quick execution process and a regulatory revamp,” said one banker.

Earlier this May, China unveiled new registration rules for domestic listed companies seeking overseas GDR offerings. Many had shelved their GDR plans as they awaited the new regime's implementation. 

A total of 10 companies raised USD 3.9bn from GDR offerings in 2022, one in London while the rest in Switzerland, according to Dealogic

To be clear, China's Swiss GDRs issuance in 2022 was way better than expected. Majority of the investors, who were based in Hong Kong, often converted the GDRs into domestic shares as soon as conversions became possible, weighing on local share prices. That backfired, resulting in complaints from domestic retails. The regulator in the end decided to shut down the avenue and rewrite the game rules. 

Six out of the 10 GDRs priced last year have fallen by 41% on average since their debuts on the Swiss exchange, based on data available on Dealogic. Among the 10, three were chemicals companies, two were healthcare, two machinery, while technology, consumer products, and automotives contributed to the remainder.

Following a hiatus earlier this year, we have seen seven Chinese GDRs getting priced thus far, raising USD 1.9bn collectively. And bankers are hoping 2023 will surpass last year’s deal count and value.

More clarity from the regulators certainly helps the market. 

“We’re arranging at least 5 deals that are likely to take place before the end of the year. Thanks to the listing rule clarification, A-share companies have resumed interest in GDR offerings,” said another banker.

Most of the GDR applications were cancelled earlier this year as some issuers were awaiting new guidelines from regulators, a third banker said.

Listing GDRs on a European exchange helps onshore-listed Chinese companies raise foreign capital, an otherwise near-impossible task in a high interest rate environment and as US listings remains a remote prospect, the bankers said.

Normally, a GDR issuance can be completed within three to four months, including the regulatory approval process, the first two bankers said.

But as the post-listing performance of the Chinese GDRs suggest, a lack of liquidity may hamper demand for such papers, said a banker, while a lawyer added that the new rules have turned what was a relatively straightforward process into one that involves additional regulatory approvals.

Among others, the most significant change that impacts GDR applicants is the obligation to seek additional approval from local stock exchanges after a board or shareholder meeting. This wasn't compulsory previously. Companies are also required to notify the China Securities Regulatory Commission (CSRC) within three days after an application of listing or issuance of new shares has been submitted to overseas bourses. These may bring the regulatory procedure for GDR offerings closer to that for domestic initial public offerings in China.

Despite challenging market conditions, bankers face limited options as they scout for fee-generating opportunities from mainland China. Secondary listings in Hong Kong by onshore-listed companies have also dwindled in deal value. 

This year has seen one A-share listed company - Beijing SinoHytec [SHA: 688339; HKG: 2402] - raising USD 141m from an H-share secondary listing, versus USD 544m raised last year, according to Dealogic

The market hasn't been on the side of issuers this year. But with better clarity from regulators, and perseverance of investment bankers, it's not impossible for them to turn this tiny sub-segment of the broader equity capital market into a sweet spot for an otherwise daunting 2023. 

Analytics by Mimi Lee