By Chao Deng
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (April 21, 2018).
BEIJING -- China's government wants Alibaba Group Holding Ltd.
and other Chinese tech giants listed abroad to trade on the
nation's stock markets. Now regulators are trying to figure out how
to do that without seeing those shares fall too low or soar too
high.
Officials at the country's securities regulator and its two main
stock exchanges are racing to issue China's first class of
securities known as depositary receipts and are facing pressure to
get the details right, according to people familiar with the
deliberations. The receipts are a type of security offered on a
local stock exchange by a company listed in another country.
Chinese leaders see a successful launch as key to reversing a
trend of nearly two decades that saw marquee tech companies list
overseas where financing was more reliable. These companies are now
some of the world's most valuable. Bringing them home will help
deepen China's stock markets and boost its competition with the
U.S. over future technologies.
"It's in China's national interest to give more of a Chinese
identity to these firms," says Lyndon Chao, head of equities at
industry group Asia Securities Industry Financial Markets
Association.
Among tricky issues the officials will face are those regarding
timing and valuation, the people familiar said. Many of the Chinese
tech companies have seen their share prices rocket during the
yearslong U.S. tech boom, then dip in the U.S. markets' recent
pullback.
That's fueling Chinese officials' fears that the depositary
receipts will begin trading at high prices and then drop, hammering
ordinary investors.
At the other extreme, interest in owning shares in choice
companies -- like e-commerce giants Alibaba and JD.com Inc., and
smartphone maker Xiaomi Corp. -- is likely to be high. An initial
low price could then soar, causing investors to pull money from
other stocks and driving down share prices of other companies,
according to the people familiar.
"We must find a balance," one person said.
A task force comprised of officials from the China Securities
Regulatory Commission and the exchanges are looking at everything
from accounting rules to disclosure requirements, this person said.
The commission wants to move forward quickly, the people said. Some
investment bankers believe an Alibaba listing could come this
summer.
Unlike in the U.S., the securities commission gets to decide
which companies list. It regularly tinkers with the pace of
approvals to nurture stable markets and tightly controls
foreigners' access.
The securities commission didn't respond to a request for
comment, nor did the Shanghai and Shenzhen stock exchanges.
Many of the tech firms that listed overseas did so because they
were incorporated abroad, making them ineligible at the time to
offer shares at home. But Chinese leaders recently allowed an
exception. In March they approved a plan to allow foreign-listed
companies specializing in innovative technologies -- with at least
200 billion yuan ($31.8 billion) in market capitalization -- to
trade on mainland stock exchanges.
By using depositary receipts, the securities commission can
create a separate set of new rules, instead of revising regulations
that apply to all currently listed companies.
"It's a breakthrough....in a regulatory structure that is not
accommodating" to listings of foreign-incorporated companies yet,
Hong Kong Exchanges and Clearing Ltd. Chief Executive Charles Li
said Friday at D.Live, The Wall Street Journal's tech
conference.
A report by China's state-owned brokerage Citic Securities
identified six "China-concept" stocks listed abroad likely to
satisfy the regulator's requirements for capitalization,
innovation, competitiveness and other factors: Alibaba, JD.com,
search engine Baidu Inc., gaming and internet company Netease Inc.
and telecommunications operators China Mobile Ltd. and China
Telecom Corp.
Their combined market capitalization is 5.3 trillion yuan, in
Citic's estimate. Allowing them to list 5% of their overseas
tradable capitalization is roughly the total amount raised in new
public share offerings on the Shanghai and Shenzhen exchanges last
year, Citic said.
That will give them outsize influence on the Chinese market,
some analysts believe, just as U.S. exchanges are experiencing
greater volatility.
"The timing isn't appropriate," Dong Dengxin, a Wuhan University
of Science and Technology professor of finance, wrote on social
media last month. "If the U.S. market crashes, [Chinese depositary
receipts] will too."
The depositary receipts wouldn't be exchangeable with U.S.
shares, limiting some risk. But officials are still concerned
professional investors who can access both markets could make a
windfall from a price gap.
Regulators have already fast-tracked a public-offering approval
for one tech company and are eager to make it easier for more.
That's providing a tailwind for the depositary receipts. And it
could stir up bad blood among the hundreds of domestic firms
currently awaiting permission to list, one of the people familiar
said.
"It's a bit like the older son came back from a trip and the
father is happy to see him," said the person. "Meanwhile, the
smaller son who never went away isn't happy."
Write to Chao Deng at Chao.Deng@wsj.com
(END) Dow Jones Newswires
April 21, 2018 02:47 ET (06:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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