Stock Connect scheme assists Chinese firms in financing overseas listings, expansion

China's efforts to link its capital market with the rest of the world have not been held up by geopolitical tensions or market volatility, with global depository receipts (GDRs), which are gaining increasing preference from Chinese companies, serving as solid proof.

GEM Co Ltd, a company principally focused on the recycling of batteries, electronics and cars, which is listed on the Shenzhen Stock Exchange, announced on April 30 the issuance of GDRs on the SIX Swiss Exchange. The proceeds will be used to support its overseas nickel mineral projects and the development of battery materials.

On April 7, Shanghai-listed machinery company Keda Industrial Group Co Ltd announced it would cease its 2022 private placement valued at over 2 billion yuan ($298.85 million) and instead carry out a GDR issuance on the Swiss bourse, making it the first A-share company substituting a private placement with the relatively novel overseas financing option.

Usually referring to a certificate issued by a depository bank that represents shares in a foreign stock on two or more global markets, GDR in China stands for the certificate of A-share stocks traded in overseas markets, which is denominated in yuan. It has become one of the catchphrases for Chinese companies' overseas financing this year. Industry leaders such as Sany Heavy Industry, electric vehicle cell maker Gotion High-tech and Lepu Medical Technology Ltd have announced their GDR issuance plans in Switzerland earlier this year.

Chinese companies' active outbound reach in overseas capital markets can be largely attributed to the latest amendment to the Shanghai-London Stock Connect scheme regulations. On Dec 17, the China Securities Regulatory Commission, the country's top securities watchdog, expanded the scope of the Stock Connect scheme to include bourses in Switzerland and Germany.

Upon the expansion, a total of eight companies have announced their GDR issuance plans so far this year, with the majority targeting the Swiss bourse and the other－clean energy solutions provider Minyang Smart Energy－heading for the London Stock Exchange.

It should be noted that companies announcing GDR plans this year are mostly industry leaders showing China's competence in smart manufacturing, said Bruce Pang, head of macro and strategy research at China Renaissance Securities.

In terms of the destination for listing its GDRs, Gotion High-tech responded in a note that the Swiss capital market, which is relatively smaller with only 200-plus public companies, celebrates high market value with each company's cap approaching $9.5 billion. Higher market valuation is of course what companies are looking for.

On the other hand, local investors in Switzerland, which boasts the world's largest asset management destination, will look for securities denominated in a stable currency. GDRs, which are denominated in yuan, will meet such demand, said Gotion.

Mandy Zhu, head of China operations for global banking at UBS Investment Bank AG, explained that regulatory bodies in Germany and Switzerland have both given substantial support to the expansion of the scope of the Stock Connect scheme and much progress has been made. It is only because the Swiss bourse has implemented detailed regulations more rapidly that most Chinese companies have listed their GDRs here at present.

The German exchange and industry insiders are looking forward to the leap.

"With the inclusion of the German market to the China-Europe Stock Connect, Deutsche Boerse Group, as a leading international exchange organization and innovative market infrastructure provider, can offer a liquid, transparent, efficient and reliable market to Chinese corporates for financing their business scope expansion in Europe and reach the European investor base," said Katrin Otto, head of China market development at Deutsche Boerse Group, which operates the Frankfurt Stock Exchange.

Capital markets play an important role in an economy, providing vital financing opportunities for a company's growth strategy and hedging instruments that allow the market participants to counteract their real-economy-related risks, Otto said.

"With the Connect scheme, we are now able to provide financing opportunities for both Chinese and European companies in each other's market－another milestone in providing global capital markets access," she said.

Being the only European bank among the four depository receipt banks, Deutsche Bank is assisting several Chinese companies in their planned GDR offerings.

Wu Qiong, head of China investment banking at Deutsche Bank, who has already noticed an uptick in Chinese companies going public in Europe, said the momentum is expected to be carried on thanks to the close relationship and collaboration between the two economies.

Tapping into the European capital markets via GDR issuance represents the success of well-established Chinese issuers and marks a key milestone of their globalization plan, said Wu.

"Frankfurt plays a key role in connecting international companies with a diverse range of top-tier global investors. Therefore, a Frankfurt listing would be a natural fit for Chinese companies among other major European stock exchanges. We expect to see more blue-chip Chinese companies across various sectors listing in Europe," he said.

As Wu further explained, a European GDR offering could bring higher brand and product recognition globally to Chinese companies, and attract more offshore talent via the GDR share incentive scheme. The strength of Europe's capital markets also provides a diversified fundraising channel and fungible liquidity pool for Chinese corporates.

"For European and global investors, it is a unique opportunity to ride on the growth opportunities that the Chinese economy presents and fast-growing sectors in China via investing in Chinese GDRs," he added.

Huatai Securities was the first Chinese company to issue GDRs on the London bourse in June 2019. As of now, there have been four Chinese companies that have completed GDR issuances on the London Stock Exchange.

Dai Kang, chief strategist of GF Securities, added that the issuance of GDRs will help to attract international investor interest in the A-share market, thanks to the presence of the Chinese companies on overseas bourses.

As more companies issue GDRs, the central regulators may speed up the trial program of Chinese depository receipts, under which overseas-listed quality Chinese companies will return to the A-share market at a faster pace, added Dai.

In an interview with China Media Group on May 10, CSRC Vice-Chairman Wang Jianjun said more solid opening-up measures will be taken, under which the Stock Connect mechanisms between the onshore and offshore markets should be optimized.

More European markets can be included in the China-Europe Stock Connect scheme so that capital market cooperation between China and Europe can be further strengthened, said Pang of Renaissance Securities.

There should also be more detailed regulations and specific mechanisms established for the quotation, pricing and financing of GDRs. Chinese securities regulators should also work more closely with other departments so that the issuance of GDRs can better serve the reform of the country's financial industry and the development of China's real economy, he added.