BOFIT Viikkokatsaus / BOFIT Weekly Review 2018/32

The plan to issue Chinese depositary receipts or CDRs has been shelved. The initial issue of the surrogate securities involving Xiaomi, the world's fourth largest smartphone manufacturer, was supposed to take place in July. Xiaomi indefinitely postponed its CDR offering in late June, however. According to media reports, Xiaomi's delay arose from an impasse over conditions imposed by the authorities and the diminished willingness of authorities to take on risk from an unfamiliar financial instrument. Conditions for the issue have degraded further in recent weeks with China's tumbling stock markets, increased trade tensions and devaluation of the yuan. The market capitalisation of the Shanghai stock exchange is nearly 10 % less than at the beginning of June. The Hong Kong exchange's Hang Seng index is also down about 7 % for the same period.

CDR certificates are designed to allow Chinese companies listed on foreign exchanges to raise capital on the domestic market. The most anticipated CDR issues involved China's technology giants, which include US-listed Alibaba, Baidu and Weibo. Mainland Chinese investors currently cannot trade in such shares.

While the notion of the depositary receipt is familiar, the Chinese version differs fundamentally from its American cousin, the American depositary receipt, or ADR. ADRs cannot be created without demand and their pricing is based on prices of existing shares traded on other exchanges. Brokers buy up exchange-listed shares and place them with depositary banks that oversee distribution of the relevant ADRs to investors in the US. CDRs, in contrast, are not based directly of exchange-listed shares, but rather tranches of shares issued by firms specifically for their CDR quota. In principle, CDR prices may stray far from the price of the same firm's listed shares.

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