China's securities regulator broadened the path for more overseas-traded Chinese companies to sell shares on mainland markets as part of a government push to expand the country's capital markets and support innovative businesses.
The China Securities Regulatory Commission (CSRC) broadened a 2018 pilot program Friday allowing red chip companies to make domestic listings. Red chips are Chinese mainland-based enterprises incorporated internationally and traded in offshore markets, mostly in Hong Kong. The expanded trial will include more industries such as next-generation information technology, new materials, new-energy vehicles, green environmental technology, marine equipment and companies with national strategic importance.
The program, intended to entice overseas-listed Chinese companies to raise capital on the home markets, previously was limited to companies involved in the internet, big data, cloud computing, artificial intelligence, software and integrated circuits, high-end equipment manufacturing and biotechnology.
The expansion is aimed at enhancing China's capital market, supporting high-quality red chips to trade on domestic markets and promoting development of China's new technology and strategic industries, the CSRC said.
The 2018 pilot program offered a new option for red chip companies through the issuance of Chinese depositary receipts (CDRs). Modeled after American Depositary Receipts, CDRs allow foreign-traded companies to speed around listing barriers on the A-share markets, such as restrictions on weighted voting rights -- which tech and family-owned companies favor to maintain control -- and requirements on profitability.
In May 2020, China lowered the threshold for red chip companies to help attract stocks to domestic markets. Under the new rules, red chip companies can offer shares on the mainland either as CDRs or through the direct sale of A-shares.
A lawyer specializing in capital markets said the expansion offers further policy support for more overseas-traded Chinese companies to tap the domestic capital market.
China Resources Microelectronics, the largest integrated device manufacturer in China and a unit of Chinese state-owned conglomerate China Resources Holdings, became the first red chip company to issue A-shares on the mainland in February 2020, selling stock on the Nasdaq-like STAR Market.
Several large red chip companies, including leading computer maker Lenovo Group and state telecom operator China Mobile, have also unveiled plans this year, targeting domestic share sales either through direct share sales or issuance of CDRs.
There are now three options for red chip companies to sell shares domestically. The first is to inject part of their Hong Kong-traded businesses into special-purpose vehicles registered on the mainland. The second is through CDR issuance, which allows red chip issuers to keep their governance structures, financial disclosures and audits unchanged. The last is direct A-share sales, made possible by the launch of a registration-based listing regime on the STAR Market. But companies who choose this option must adapt to domestic corporate law and listing requirements.
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