Chinese Depositary Receipts: What They Are, How They Work and Why This Represents a Golden Opportunity

Abstract

In this article the authors analyse the reform of listing rules in China and the operating mechanism of the new Chinese Depositary Receipts (CDRs). Most technology giants in mainland China, such as Alibaba, Tencent, Baidu, JD and NetEase have listed their shares on overseas stock markets such as Hong Kong and New York, in order to avoid China’s rigid and onerous listing rules concerning foreign ownership, variable interest entities, weighted voting rights and the strict profitability requirement. Recently, the China Securities Regulatory Commission (CSRC) has launched a pilot project to allow certain foreign-listed Chinese companies to issue CDRs which can be traded in the Shanghai and Shenzhen stock exchanges. Technically speaking, CDRs are not shares but they represent equity interests in foreign companies through an offshore custodian bank. Clearly, the popularisation of CDRs will benefit several parties. Chinese investors will be able to purchase interests in some of the top tech companies in the world. It will also lure international capital to the Chinese market and boost the valuation of issuing companies. The market scale of CDRs is estimated to be over $1 trillion, which will be a source of income for investment banks and international law firms.

Keywords: Chinese Depositary Receipt, CDR, Securities Regulation, Financial Law, Listing Rules, Stock Market, Xiaomi, Alibaba, Tencent, Baidu, Unicorn