How and why are Chinese companies listed in Europe now

Suspension

As the United States makes it difficult for Chinese companies to access their own capital markets, some companies seeking external financing are turning instead to Europe, where they do not face the same regulatory hurdles. A recent expanded program between China and several European stock exchanges has streamlined the process, although issues such as low liquidity persist. These lists include something called GDRs, or GDRs, similar to how shares of foreign companies in New York are traded indirectly through ADRs, or American Depository Receipts.

They are tradable securities that represent shares of a foreign entity, in this case, listed in Shanghai or Shenzhen. The shares associated with GDRs are separated from the rest and deposited in the home country. Like ADRs, a GDR can equal the underlying shares on a one-to-one basis, or it can represent a small portion of a stock or several shares. GDRs can be sold through public offerings in a process that follows the rules set by the destination exchange.

2. Why choose GDR Offer?

The US stock market, the largest in the world, is becoming more difficult to tap for large Chinese companies due to increased regulatory and political scrutiny. About 200 Chinese companies listed in New York could be fired as early as 2024 because they do not allow US regulators to check their financial audits, as US law requires to help protect investors. Talks between US and Chinese authorities have failed to resolve the issue, and US lawmakers are considering a bill to bring the deadline to next year. (Some Chinese companies aren’t waiting: Five state-owned giants in August announced plans to delist them from the New York Stock Exchange.)

For one thing, there is no such pressure regarding the opening of audit books coming from European stock exchanges. In addition, there is a system in place that makes cross-border listing easier for companies already listed in mainland China. Shanghai-London Stock Connect was established in 2019 to connect these two stock exchanges, and expanded in 2022 to Shenzhen, Switzerland and Germany. (Hong Kong investors have been able to trade stocks on the Shanghai and Shenzhen stock exchanges for years using similar relationships.)

4. Can you just switch ADR to GDR?

No, any locally listed Chinese company with ADRs must be removed from the US and re-registered elsewhere in Europe, respecting the rules set by the host exchange. A GDR cannot simply be given against an ADR.

In general, the liquidity in the European markets is much lower than in the US, which means that there are fewer buyers and sellers to facilitate trading. This may be one of the factors preventing some Chinese exporters from listing in Europe. Since the start of Stock Connect with the UK, only two Chinese companies have benefited from it. Although wind turbine maker Mingyang Smart Energy Group Ltd raised $757 million through the sale of the GDR in July – more than the original plan – trading in the following weeks was unfortunate. The reduced volume also hit four Chinese companies that debuted on July 28 in Zurich, having together raised the equivalent of $1.52 billion. That could improve, however, when it becomes fully fungible with shares listed in China, 120 days after its European debut. Based on Chinese regulations, this is the minimum holding period for Chinese GDRs.

6. Why is Switzerland advanced?

Lawyers say that the GDR process in Zurich is faster, less complicated and cheaper than in London or Germany due to the rules and requirements set by the exchange. said Christina Lee, partner and co-head of capital markets practice at Baker McKenzie for Hong Kong and China. Jos Dijsselhof, CEO of Six Group AG of the Swiss Stock Exchange, cited “the neutrality and predictability of Switzerland being a country on its own”, not part of the European Union “or any other alliance” as an attractive factor for foreign companies. There are at least four more listings that could happen as soon as this year. It was reported in August that several Chinese brokers, including Citic Securities Co. and Haitong Securities Co. They are considering applying for licenses in Germany, which will enable them to offer some investment banking services across the European Union. But as of mid-August, no Chinese company had issued Frankfurt GDRs.

7. Are European companies heading to China?

China’s Financial Supervisory Authority said in July that it was looking to encourage foreign companies to list in China as part of the Stock Connect programme. Those backed by Chinese investors were said to be among the first potential candidates, with German forklift company Kion Group AG one of those studying the possibility. Foreign companies listed there will issue standardized certificates of completion, or Chinese depository receipts.

8. What about Hong Kong for Chinese companies?

Some mainland-based companies are listing or re-registering in the semi-autonomous city. Alibaba Group Holdings Ltd., one of the companies targeted for a potential delisting in New York, said in July it wanted to change the status of its “secondary” listing in Hong Kong to “primary”. This can facilitate access to mainland investors, but not necessarily foreign capital.

More stories like these are available at bloomberg.com

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