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Beijing Moves to Curb Speculation in Chinese Depository Receipts

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Beijing is putting the finishing touches on preparations for the launch of  Chinese Depository Receipts (CDR’s), with the goal of curbing speculation in the new instruments.

On 11 May the China Securities Regulatory Commission (CSRC) announced amendments to the relevant provisions of the “Securities Issuance and Underwriting Administrative Measures” (证券发行与承销管理办法), just following the release of the draft version of the “CDR Issuance and Transaction Administrative Measures” (存托凭证发行与交易管理办法) on 5 May.

Around the same time the Shenzhen Stock Exchange released the “Notice Concerning Relevant Technological Preparations for the Launch of Appropriate Administration of Investors in Shares or Chinese Depository Receipts of Innovative Enterprises” (关于启动创新企业股票或存托凭证投资者适当性管理相关技术准备的通知), covering a range of preparatory work in relation to the new instruments.

CDR’s are a type of security that permit Chinese investors to obtain equity stakes in overseas listed companies via domestic bourses. Beijing hopes that the deployment of CDR’s will help to bring Chinese tech giants listed abroad back to the domestic A-share market.

The amendments to the Securities Issuance Measures cover a total of four areas, which analysts say will remove any remaining barriers to the launch of CDR’s by trial enterprises.

One analyst from CITIC Securities said to 21st Century Business Herald that “the Opinions issued by the State Council will confirm that CDR’s are a type of security, and that the provisions of the Securities Law are applicable to their issuance and transaction.

“However, given that CDR’s are a new type of security, the Securities Law does not contain any specialist provisions for them, and it is possible that existing regulatory rules for stocks and listed companies will not be fully applicable to them.

“For this reason, [the amended Administrative Measures] make arrangements that dovetail with the Securities Law, as well as clarify which items in the Law are applicable to CDR’s.

“The amendment of the Measures is based on these considerations, and provides a systemic foundation for the issuance of CDR’s”

CSRC has also introduced greater flexibility for the pricing of CDR’s, cancelling the requirement that companies issuing under 20 million shares in total should engage in direct pricing, and instead allowing them to independently choose their pricing method.

Another key area targeted by CSRC is speculation in CDR’s, with the amended Securities Issuance Measures stipulating that offline instruments subject to a lock-in period cannot participate in online back mechanisms.

They also permit strategic allotment or over-allotment options, to make it easier to control the online and offline allocation structure, as well as stabilise the market and curb speculation.

“Allowing enterprises that issue CDR’s to make strategic allotments or over allotment adoptions on the basis of need will reduce the shock of CDR issuance for secondary markets and maintain market stability,” said one observer.

The introduction of a market maker transaction system for CDR’s is also intended to curb speculation in the new instruments.

“From the time that official mention of a CDR mention was made, preventing market speculation has been one of several key areas that regulators have focused upon.”

“It will be difficult to speculate in CDR’s under a market maker transaction system,” said an executive from one large-scale securities firm in the Beijing area.

“Regulators have continually emphasised the need to prevent CDR products, and in particular the first batch of CDR products, from being subject to market speculation.

“There is no doubt that by adopting the market maker system, the pricing of CDR products will be able to achieve the goal of containing share price via the model of dual quotations provided by market makers.

“The experience of the New Third Board market indicates that enterprises with more than five market makers very rarely see excessive fluctuations in their share prices, and multiple market makers operating simultaneously has a very effective stabilising function for prices.”

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