Shenzhen the Stage for Further Chinese Depository Receipt Reforms as China Drives Capital Market Internationalisation

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The southern tech hub of Shenzhen is set for further trials of Chinese Depository Receipts (CDR) as part of broader reforms to drive the growth of China’s capital markets.

The “Integrated Reform Trial Implementation Plan for Shenzhen’s Establishment of an Advanced Demonstration Zone for Socialism with Chinese Characteristics (2020 – 2025)” (深圳建设中国特色社会主义先行示范区综合改革试点实施方案(2020-2025年)) issued by Beijing on 11 October highlights the importance of Shenzhen for reforms to China’s capital market.

Capital market reform measures outlined by the Implementation Plan include “driving ChiNext reforms and the trial registration system; trials for the domestic issuance of stocks or CDR’s by innovative enterprises, the establishment of a Third Board listed company transfer mechanism, optimisation of entry conditions for the privately offered fund market, and exploring optimisation of entry conditions for venture investment enterprises.”

CDR’s are a type of financial instrument that permit Chinese investors to obtain equity stakes in enterprises listed on overseas exchanges. Beijing hopes that CDR’s will facilitate the return to the A-share market of Chinese tech giants that first listed on bourses outside of China.

In an article written for 21st Century Business Herald Zhou Tianyun (周天芸), a professor from the International Finance Institute of Zhongshan University, writes that the Implementation Plan will drive the use of CDR’s in Chinese capital markets by conferring Shenzhen with greater independent control over financial sector policies.

“[The Implementation Plan] proposes the formulation of a special measures list that loosens market entry in Shenzhen, on the basis of the national, unified negative investment list,” said Zhou.

“It support qualified enterprises in Shenzhen going abroad to obtain financing via listing, and trial innovative enterprises issuing stocks or CDR’s domestically.

“While provisions in relation to CDR’s were very early on included in rules for the ChiNext Board, the current trials emphasise a focus by the central government on innovative companies.”

Zhou said that CDR’s will drive the growth of China’s equity market, and accelerate the internationalisation of its capital markets as a whole.

“The internationalisation of China’s capital markets is an inevitable trend – this will include institutions, transaction types, transaction systems, and transaction supervision,” wrote Zhou.

“CDR’s, as an innovative financing tool, are of benefit to creating space for domestic and overseas capital market cooperation, and a signal that Chinese capital markets are becoming more international.

“[They] can help to raise capital market regulatory levels and international renown, as well as enable them to gradually match international standards.”

Zhou also expects CDR’s to be of benefit to the formation of a “multi-tier capital market” in China, as well as to drive further financial reforms.

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