Switzerland has emerged as an alternative for Chinese companies looking to sell shares abroad amid ongoing tensions between the US and China.
The problem is that most Chinese companies tumble after listing on the SIX Swiss Exchange, with very little trading volume.
Since last year, a total of 13 Chinese companies have issued Global Depository Receipts (GDR) in Switzerland, raising a total of US$4.3 billion, dwarfing the scale of Chinese companies’ financing in the United States. According to Dealogic data, since the beginning of 2022, Chinese companies have raised only US$1 billion in US IPOs. At least 30 other Chinese companies have submitted applications to issue GDRs in overseas markets, according to regulatory announcements seen by Goldman Sachs research analysts.
The listing of Chinese companies in Switzerland is part of the China-Europe stock interconnection mechanism, which began with the Shanghai-London Stock Connect launched in 2019. According to this plan, companies already listed on mainland Chinese or European exchanges can be listed and traded on the other’s market. China’s securities regulator issued revised listing rules early last year in an attempt to expand the interconnection to include the southern Chinese city of Shenzhen as well as exchanges in Germany and Switzerland. But so far, no European company has listed in China through this mechanism.
Chinese companies already listed in Switzerland include several manufacturers of lithium battery materials, a medical technology company, a conglomerate that makes power tools and some renewable energy companies. The companies sold dollar-denominated GDRs, and the proceeds were mainly used for expansion plans. Chinese banks play a key underwriter role in these deals, with more influence than Western banks.
Si Fu, China equity portfolio strategist at Goldman Sachs, said the overseas shares were for European investors, who do not have easy access to mainland China’s heavily regulated stock market. GDRs can be converted into domestic benchmark A shares after 120 days of listing, which may be the reason for the decline in stock prices of some Chinese companies listed in Europe.
Fu said this could be the result of investors selling shares after the 120-day redemption restriction expired, and she said the market was concerned about the potential sell-off.
Some traders and investors suspected that speculators in the market took advantage of the mechanism of Chinese companies listing in Switzerland to buy GDRs issued by Chinese companies and short-sell the Chinese A-shares of the same company. Profit from falling A shares through arbitrage trading.
“I don’t think the creation of arbitrage opportunities is what regulators want,” said Jon Withaar, head of Asia special situations at Pictet Asset Management.
120 days after the nine companies whose redemption restriction period expired were listed in Switzerland, the domestic A shares fell by an average of 11%, and the largest drop was 33%. Some of those stocks have since fallen further.
Bankers and lawyers say the China Securities Regulatory Commission has slowed its approval of new GDR issuances in recent months. Hang Wang, co-chairman of Baker McKenzie’s China capital markets practice, said some firms had received more specific follow-up inquiries from the China Securities Regulatory Commission about backgrounds of potential investors in related offerings, arrangements for switching restrictions and how the funds raised will be used.
Wang Hang said regulators would carefully scrutinize whether a company could attract foreign investors and whether the funds raised were really used properly.
Chinese battery company Contemporary Amperex Technology Ltd (300750.SZ, or CATL) previously planned to issue about $5 billion in GDRs in this way, according to people familiar with the matter. The CATL deal, along with other deals, has been put on hold amid heightened regulatory scrutiny in China, including an investigation into why liquidity has been sluggish since the listing, some of the people said.
The China Securities Regulatory Commission said it was working to improve GDR issuance rules to ensure compliance with domestic market regulations, and said it was deepening communication with overseas regulators and exchanges.
Responding to questions, the CSRC said it was improving the way it monitors and evaluates how the depositary receipt interconnect is functioning.
CATL and the Shanghai and Shenzhen stock exchanges did not respond to requests for comment.
According to the application feedback published on the website of the China Securities Regulatory Commission, since last year, the China Securities Regulatory Commission has routinely asked Swiss GDR listing applicants about the potential composition of GDR investors and how the conversion of GDR to Chinese benchmark stocks will affect the market.
Companies have delayed GDR filings amid speculation that the CSRC may issue new guidelines on such listings, although the CSRC recently approved some existing applications, some traders said.
On Tuesday, shortly after The Wall Street Journal article was published, the China Securities Regulatory Commission issued a new set of guidelines for domestically listed companies issuing GDRs abroad, saying that companies must explain the composition of target investors, the use of funds raised and other matter.
Jurg Schneider, a spokesman for Swiss exchange operator SIX Group, said it wasn’t just Swiss-listed Chinese companies that were down, but Chinese stocks in general were also lower.
Judging by the current general market environment, investors don’t appear to want to build exposure to China, he said.
Dealmakers say the GDR is an easier way for domestically listed Chinese companies to raise capital abroad than listing in Hong Kong or New York. Lu Lerong, a lecturer in law at King’s College London, said listing in Europe may also add to a company’s reputation, but how to market shares and products to Europeans after listing is equally important. Lu Lerong has done research on the listing of Chinese companies.
Issuing GDR alone does not make it an international company, he said.
Annette Weber, who has worked on GDR transactions and is now a lawyer at Swiss firm Advestra, said another reason for the lack of attractiveness of GDRs is that European investors lack understanding of some companies that have already listed in Switzerland.
“The names of these companies are not well-known in Switzerland and Europe,” Weber said. She also said that some Chinese companies that issued GDRs had not done relevant roadshows in Europe.
For some long-term investors familiar with Chinese stocks, the lack of liquidity in the GDR market is a disappointment.
“We generally don’t buy GDRs that are less liquid than their peers,” said Louis Lau, investment director at Brandes Investment Partners.
He said that if European investors or a core investment group can be persuaded to hold a large amount of GDR and actively trade, it will naturally form a climate.