Two big tech groups are set to give a boost to the Chinese certificate of deposit (CDR) market, once celebrated by Beijing as the first channel for fast-growing companies to sell shares in mainland China.
Shanghai Technology Offers Star market for artificial intelligence start-up Megvii and computer maker Lenovo would be the first large companies to be listed via CDRs since their launch with fanfare nearly three years ago.
The announcements also come because Washington has thorough examination on Chinese groups doing business in New York, including legislation that could force write-offs and sanctions that ban U.S. investment.
Megvii, a facial recognition company, had previously attempted a public listing in Hong Kong. He reduced his fundraising goal by 1 to 500 million dollars, before giving up the offer last year against the backdrop of US sanctions.
The company was added to the U.S. Department of Commerce’s Entity List in 2019 due to alleged human rights violations in China’s Xinjiang region. Megvii said she had not generated any income from Xinjiang in the six months leading up to June 2019.
A file released on Tuesday indicates that Chinese state-owned Citic Securities was working with Megvii on a listing, the first step in a multi-month process. The group did not say how much they were looking to raise.
Meanwhile, shares of Hong Kong-listed Lenovo jumped 17% to their highest level in more than five years on Wednesday. Lenovo said it would issue up to 10 percent of its expanded share capital in the CDR offering.
CDRs were announced in 2018 in hopes of luring mainland Chinese tech groups that trade in New York City via U.S. certificates of deposit, which have been used to raise billions of dollars on Wall Street. The CDR system was in part intended to enable Chinese tech companies to avoid issues such as the use of variable interest entities, which were otherwise not permitted on continental trade.
But the first significant attempt to issue CDRs by smartphone maker Xiaomi collapsed in the face of regulatory demands from Beijing.
The only company to have successfully listed CDRs is Ninebot, the owner of two-wheeled vehicle maker Segway, which raised RMB 1.3 billion ($ 200 million) in the All-Star Marketplace in October. Many large Chinese technology groups operating in the United States have instead opted for secondary ads in Hong Kong.
Analysts said there were downsides to selling stocks through CDRs. Ninebot had to face a long approval process due to regulatory requirements.
“There are a lot of technical difficulties and uncertainties with issuing CDRs,” said Bruce Pang, research director at investment bank China Renaissance.
CDRs cannot be traded identically with shares of the same company that trade on an offshore platform, Pang added, and they can also attract higher custodial fees.
On the plus side, he said, trading and issuance of CDRs is available to UK-based investors via the Shanghai-London. Stock Connect scheme.