Get 'em While They're Hot!

[Randy W]

CDR's, that is - similar to ADR's in the American stock market, but with a big difference

 

I'm unclear on wht Chinese tech stocks would have to go to a foreign (Hong Kong) stock exchange in the first place, instead of being directly available on China's stock exchanges.

 

BRACE FOR AN EVEN BIGGER BUBBLE IN CHINA’S STOCK MARKETS

Rocky ride ahead if a new financial instrument fashioned after American Depositary Receipts that lets Chinese investors dabble in the country’s tech champions gets too popular

 

 

China’s own national internet champions don’t figure at all in the portfolios of mainland Chinese investors. Shares in Alibaba, Baidu and Weibo, to name three, are publicly listed, but on US, rather than mainland Chinese stock exchanges.

 

. . .

 

But with access to US markets forbidden by China’s regulations, mainland investors, who love nothing better than a hot tech stock, have badly missed out.

 

. . .

 

The first CDRs will hit the market in the middle of July, when Xiaomi, the world’s fourth largest smartphone maker, launches its US$10 billion initial public offering in Hong Kong. As part of that deal, the company plans to issue CDRs worth up to US$3 billion in the mainland market. Other Chinese technology stars are tipped to follow in rapid succession.

 

The new securities are called CDRs in emulation of the American Depositary Receipts, which, over recent decades have so successfully allowed US shareholders to invest in the equity of non-US companies. However, there is a crucial difference between ADRs and CDRs, which will greatly complicate the CDR investment story.

 

ADRs are fully fungible with their underlying shares. This means new ADRs can be created (or deleted) in line with market demand. If the demand is there, brokers bundle up shares listed in the company’s home country and lodge them with a depositary bank, which then issues receipts that can be traded in the US. As a result, ADRs always trade in line with the price of their underlying shares, as any significant divergence in price would instantly be arbitraged away.

In contrast, a company’s CDRs will not be fungible with its primary shares listed offshore. In effect they will be an entirely new class of stock, not securities created by bundling together underlying shares. That means their supply will be inflexible, not adjustable like the supply of ADRs. And because arbitrage between the mainland’s markets and markets offshore is difficult at best, and often impossible, large price discrepancies are likely to open up between a company’s CDRs and its primary shares.