Tech Giants Talk the Homecoming Talk, But Will China Roll Out the Welcome Mat?
I’ve felt a sense of deja vu these past two weeks amid the latest chatter of bringing China’s high-tech leaders home to list. The topic has popped back into the headlines on reports that Beijing is considering a plan that would let overseas-listed Chinese firms like Alibaba and Baidu make secondary listings on the mainland through the issue of China Depositary Receipts, or CDRs.
I’ll explain the concept shortly, along with some technical issues that such a program would need to address. But before that, I’ll begin with a heavy touch of skepticism of the “I’ve seen this before” variety, based on numerous cases of similar talk in the past that never came to anything.
That said, my contacts who closely follow this particular topic were quite mixed on the chances that this time will be different. Among this limited group, nearly everyone sensed a stronger sense of purpose this time around, perhaps due to a certain loss of face at having your hottest companies listed in other markets, mostly New York and Hong Kong.
A good analogy would be the strangeness of seeing Apple, Amazon or Facebook, which are squarely rooted in the U.S., listed in London, Frankfurt or Hong Kong. While such a reality might seem unthinkable, such is the case for nearly every leading Chinese tech firm, including Alibaba and Baidu, which are listed in New York, and Tencent, which is in Hong Kong.
That’s not to say that U.S. and Hong Kong investors don’t appreciate these companies, even though most have never used Alibaba’s hugely popular online marketplaces, or Tencent’s equally popular social networking services. Investors in both places have given the pair huge valuations of around $500 billion, making them two of the world’s 10 largest publicly traded companies.
And yet despite their huge success, that pair and most of China’s other top tech names, including gaming giant NetEase, online travel specialist Ctrip and the Twitter-like Weibo, remain out of reach of most Chinese stock buyers.
Old as the woods
Talk of luring these companies to list back home seems as old as the woods, at least in terms of China’s relatively short history with stock markets and private companies. My earliest memory of such talk dates back to just after the start of the new millennium, when NetEase and a few other early high-tech firms said they might consider secondary listings outside the U.S.
Another memorable effort came about a decade ago when there was talk of setting up an international board in Shanghai, which would only be open to offshore-domiciled companies. That was meant to attract not only the China tech firms, many of which are technically domiciled in places like the Cayman Islands, but also so-called “Red Chips” like China Mobile and Lenovo, which are also domiciled in similar places for technical reasons and thus banned from trading on the mainland.
While none of those plans ever went anywhere, this latest CDR plan seems to be generating quite a bit of buzz. Put simply, it would mimic a similar U.S. system that lets companies package their ordinary shares that trade on one stock exchange into bundles that can then be traded on another. The American Depositary Receipt (ADR) program is quite old, and already allows big Chinese names like China Mobile and PetroChina to have major secondary listings in New York.
Thus the CDR plan now being discussed in Beijing would allow big names like Alibaba and Tencent to make similar secondary listings back at home. A number of Chinese tech chiefs, including Baidu’s Robin Li, were quizzed on the subject as they attended the annual meeting of China’s legislature and its main advisory body in Beijing over the past week. Not surprisingly, all said they would consider returning home to list under such a plan. After all, talk is cheap.
One of my contacts who works with quite a few of these companies was surprisingly bullish on the chances for success this time around, saying: “I think this time it’s serious.” He pointed to the recent de-listing of security software giant Qihoo 360 from New York and a relatively quick re-listing of the company in China as a sign of Beijing’s new resolve to bring home more of its high-tech champions.
The other sign he pointed to was the recent approval of a mainland listing for the China operations of Foxconn, a massive Taiwan-based contract manufacturer that counts Apple as one of its top customers. Foxconn Industrial Internet was given special status that allowed it to effectively jump the huge queue of other companies waiting to list on the mainland, as part of Beijing’s efforts to show it was serious about attracting top Chinese firms to list at home.
Any bettors out there who really believe such a move is coming could potentially make some money by buying these U.S. and Hong Kong-listed tech shares. The logic would say those shares might rise in anticipation of the same firms getting higher valuations from Chinese investors if and when they make secondary listings back at home. But such logic also depends on creation of a system that would let investors freely swap back and forth between CDRs and the companies’ current U.S.- and Hong Kong-listed shares, something that’s by no means guaranteed.
As with many things, the devil will almost certainly lie in the details of such a plan. China doesn’t exactly have a stellar track record on that front, largely due to its lack of experience and also the tendency of local investors to find loopholes to exploit the system wherever possible. At the end of the day, Beijing first and foremost needs to find the resolve to see this plan through to actual execution — no small feat for a government that often gets cold feet at the first sign of even the smallest volatility in the nation’s young financial markets.
Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com
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