When electric scooter maker Ninebot completed the first-ever sale of Chinese depositary receipts (CDRs) on Monday (October 19), almost no one stood up and took notice.
It is nearly two and a half years since mainland regulators set out to convince foreign-registered Chinese firms to sell CDRs at home.
The State Council loved the idea. In May 2018, China’s cabinet was bullish on the outlook of a new asset class designed to mimic US depositary receipts.
During the last two decades, myriad Chinese firms have registered overseas, to skirt rules that restrict ‘foreign’ capital from investing in sensitive industries such as telecommunications and the media.
Early-era Chinese firms, including Sina, Sohu and NetEase, took advantage, adopting a variable interest entity (VIE) structure and selling shares in New York.
Regulators saw CDRs as the ideal way to convince some of these listed firms – and a few unlisted ones – to return to the motherland and hit up investors in Shanghai or Shenzhen.
Damp squib
At the time, the move made good sense. Then as now, Beijing was keen to get more of its best young firms to list shares at home.
It didn’t work out. In fact, it was the biggest damp squib since, say, Y2K.
Smartphone maker Xiaomi made the early running. In summer 2018, it set out to complete its Hong Kong IPO while also being the first firm to sell CDRs to the public.
It ticked the first box – though only after pricing its stock sale at the bottom of the range – but was forced to put a hard cross in the second.
When the China Securities Regulatory Commission (CSRC) published a list of 84 questions it posed to Xiaomi – one of them asked what the firm actually did – it pulled the plug.
Quickly, the roster of mostly national tech champions tipped to follow in Xiaomi’s foosteps, including Alibaba, Baidu, NetEase and Tencent, dwindled to zero.
And so, the CDR dream died – until this week.
Ninebot’s initial public offering (IPO) on Shanghai’s Nasdaq-like Star Market was a financial success.
The loss-making Cayman Islands-incorporated company raised Rmb2.08 billion ($309 million) from its IPO, after selling 70.41 million CDRs at Rmb18.94 apiece.
Its backers include Intel, venture capital outfit Sequoia Capital and, in one of those quirks of history that makes you wonder if there is someone out there who dislikes loose ends, Xiaomi, which owns a 10.91% stake.
So, what does the future hold?
Will the sale by Segway-Ninebot, to use the company’s full name – it bought the US maker of two-wheel transporters in 2015 – kick-start an exciting new asset class? Or, given how hard it was to get a single firm to sell CDRs, is it a case of one-and-done?
China wants more of its best firms to list at home – that much is clear.
Craig Yan Zeng, the CFO of LexinFintech, a consumer-finance platform listed on the Nasdaq and incorporated in the Cayman Islands, said his firm would consider selling shares in its home market. Like Ninebot, LexinFintech operates a VIE structure.
Doubts remain
However, doubts remain. Mainland regulators are not wholly sold on the idea of letting VIEs – which typically rely on a complex network of offshore holding structures – to list onshore.
Ninebot had to provide 1,600 additional pages of documents to the listing committee in Shanghai before it consented.
Besides, China’s growth-oriented stock markets have moved a long way in the last two-plus years. Shanghai’s Star Market is going great guns, as is Shenzhen’s revamped ChiNext bourse.
Both are attractive listing destinations for good, young Chinese firms who don’t run VIE structures and won’t have to jump through additional regulatory hoops.
Not long ago, CDRs looked like the future. Despite the success of Ninebot’s IPO this week in Shanghai, they already have a distinct whiff of the past.
