China’s tech giants may still shy away from plans to bring them home

A Xiaomi Corp. Mi Mix 2 smartphone sits on display during a launch event in Beijing, China, on Monday, Sept. 11, 2017. Photographer: Giulia Marchi/Bloomberg

After years of watching its tech stars head for listings in the U.S. and latterly Hong Kong, China has had enough.

Beijing’s plan to bring home the smartphone maker Xiaomi Corp. (whose float might give it a mind-boggling $100 billion value), and the U.S.-listed search engines Baidu Inc. and Sogou Inc., centers on Chinese depositary receipts.

Beyond a couple of big names, though, it’s unclear there’s much of a future for these certificates issued by Chinese banks.

CDRs, representing foreign-listed stock, were talked about even before Shanghai tried and failed to launch an international board in the absence of a fully convertible yuan. Now the pressure is on: Hong Kong is rushing through plans to lure Chinese tech, including allowing shares with restricted classes and even waiving its profitability rules for biotech firms.

Depositary receipts have two advantages in China’s fightback: They bypass laws preventing foreign-incorporated firms from listing; and because the underlying share isn’t traded, they don’t pressure capital controls.

There are technical hurdles, though. While details are scant, it’s questionable just how much leeway the China Securities Regulatory Commission would give CDRs of companies like Baidu that enjoy multiple classes of shares (banned in China) and an offshore VIE structure.

That’s not to say there won’t be exceptions in the pursuit of Beijing’s goals. The queue for approval from the CRSC demonstrates the fluidity of the rules: Dalian Wanda Group Co., whose debt-driven acquisitions upset Beijing, was given a lower priority for its property unit, while Qihoo 360 Technology Co. got a backdoor listing in record time even as reverse mergers were frowned upon.

Moreover, the retail investors who dominate China’s market, and have few options to buy overseas, are likely to welcome the famous homecomers. They won’t care whether they’re getting a CDR or straight stock, as long as they own a piece of a Baidu or an Alibaba Group Holding Ltd. — just look at the premiums mainland investors give tech firms at home.

The CDR route would also be a way for these companies to skip the requirement for a three-year earnings track record and the CSRC waiting list.

Still, resistance to CDRs is more likely to come from the firms themselves.

Xiaomi may consider a CDR alongside a Hong Kong float, to meet its fundraising targets, but the companies China really covets — the unicorns, and New York-listed giants like Alibaba — have less incentive to come home. For one thing, even a CDR would mean bowing to the demands of the CSRC, a regulator known to change the rules and open and close the IPO market at will.

And if the desire is access to the mountain of Chinese money, a Hong Kong listing works just as well. Tencent Holdings Ltd., for example, is one of the most popular stocks on the southbound leg of the pipe connecting the city’s exchange with bourses in Shanghai and Shenzhen.

A unicorn planning its first listing would be an even harder draw. How do you persuade foreign buyers of your funding rounds to accept an exit in China, with cash in yuan? That’s a big ask for investors, and for tech firms seeking a global brand and foreign currency.

Then there’s the perpetual overhang of risks to the yuan: An American Depositary Receipt allows the holder to walk into the issuing bank and swap the paper for underlying shares. Would a CDR investor get similar access to dollar-denominated Baidu stock?

A listing in China might bring cash and volume, but over the longer haul, it might not be the piggy bank its valuation suggests. Secondary share sales are harder to do in China, where regulators need to approve all plans to sell stock. In many other markets, a company only needs a mandate from investors at the annual meeting to approve block trades for a year.

Some overseas-listed Chinese tech companies may take the CDR route home. The stars, publicly traded and otherwise, are unlikely to do so unless their hand is forced. The Hong Kong and U.S. exchanges can rest easy for a while.