China-Swiss stock link has flimsy foundations
HONG KONG, March 17 (Reuters Breakingviews) - A stock scheme linking China and Switzerland has attracted ire from an unexpected source: Beijing. The Chinese securities regulator is halting applications from mainland-listed firms seeking to sell global depositary receipts in Zurich, Bloomberg reported on Thursday. Concerns that Chinese investors are buying overseas to make a quick profit at home are valid. Yet in the absence of interest from international institutions, such cross-border stock links serve little purpose.
Since last year, 11 Chinese companies have raised a combined $3.6 billion by selling GDRs on the Six Swiss Exchange, data from Dealogic show. Looser listing requirements and faster approvals have made the bourse an attractive destination for companies seeking U.S. dollars. At least 30 more firms have announced plans for secondary offerings in Zurich, IFR reported last month; Contemporary Amperex Technology (300750.SZ), the world's largest lithium ion-battery maker, is readying a $5 billion listing in what could be by far the largest Chinese GDR offering in Europe.
Far from attracting new international investors, though, these deals have become a get-rich-quick arbitrage for Chinese traders. Most mainland GDRs are sold at a roughly 10% discount to the prevailing share price at home, and can be converted into Shanghai- or Shenzhen-listed stock after a typical 120-day lockup. Savvy punters with access to foreign funds can therefore make a quick and relatively risk-free profit by shorting the Chinese stock and buying the discounted GDRs.
This helps explain why Swiss shares of Chinese companies barely trade. Sunwoda Electronic (300207.SZ), which raised $440 million in November through an offering at a 16% discount to its Shenzhen stock, recently said that more than half of its Zurich shares have been converted into their mainland equivalent. Gotion High Tech (002074.SZ) has seen zero turnover in its GDRs since a post-offering lockup expired last year.
If Chinese regulators tighten the approval process for companies seeking to issue GDRs and scrutinise participating investors, they might weed out companies which have little interest in attracting new shareholders. A clampdown on the cross-border arbitrage could also help ease selling pressure on Chinese stocks that usually occurs when investors convert their GDRs.
Even so, the fundamental problem remains: international investors have little interest in buying Chinese shares on European exchanges, given there are many ways to directly trade stocks, including CATL’s, in more liquid markets in Shanghai and Shenzhen. A similar scheme to allow mainland firms to list in London floundered in part due to dismal liquidity. Zurich and other European bourses hoping to lure Chinese listings look destined to suffer the same fate.
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The Chinese Securities Regulatory Commission is pausing approvals for new applications from mainland-listed companies to sell global depositary receipts in Zurich and other overseas stock exchanges, Bloomberg reported on March 16, citing people familiar with the situation. Deliberations are ongoing and the CSRC could decide to lift the pause, the report added.
Policymakers are concerned that GDR issuances could lead to "significant downward pressure on China's stock market", according to the report.
Separately, plans by Chinese battery maker Contemporary Amperex Technology (CATL) to raise at least $5 billion by selling Swiss GDRs have been delayed as Chinese regulators raise concerns over the large scale of the offering, Reuters reported on March 14, citing sources.
Since the launch of a China-Swiss stock scheme in 2022, 11 Chinese companies have raised a combined $3.6 billion, according to data from Dealogic.
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