China is Taking on the U.S. to Fill its $1.4 Trillion Stock Hole

(Bloomberg) -- China has the world’s second-largest stock market, but very few of its biggest technology companies can be traded domestically.

For years, China has watched as companies including e-retailing giant Alibaba Group Holding Ltd. and search engine Baidu Inc. headed overseas to go public, enriching investors from New York to Hong Kong. Now, as the country tries to boost its equities markets, it’s looking for ways to bring businesses worth as much as $1.4 trillion back home.

Chinese depositary receipts would let offshore-listed companies valued at more than 200 billion yuan ($32 billion) offer shares on exchanges in Shanghai or Shenzhen. The CDRs would also waive corporate governance rules that have helped keep the likes of Alibaba away from their home market, a recognition of how important it’s become to win over the new titans of tech.

While policy makers have approved a trial for CDRs, details are still scarce. As investors wait, here’s what’s at stake:

China’s biggest overseas-listed tech companies have outperformed the country’s benchmark over the past three years, as the nation shifted its focus to technology and consumption and moved away from investment-led growth. At the same time, returns for investors on the mainland were muted as Chinese-listed stocks struggled to recover from the $5 trillion crash of mid-2015.

China leads the way in terms of total value of its listed mainland tech companies, but the average size of each business is one-fifth of those in the U.S. As the largest firms have fled their home country, smaller companies that stayed suffered from corporate governance concerns and the fallout from China’s deleveraging measures.

The technology sector is almost one-fourth of the entire U.S. stock market, a proportion that’s nearly twice that of China, where state-owned industrial firms dominate. CDRs could shift that ratio because they won’t only be limited to public companies: private firms valued at more than 20 billion yuan and with revenue of at least 3 billion yuan in the preceding year will be eligible for the program, along with fast-growing unlisted companies that work in the field of advanced technology and have a leading advantage in their sector.

Six of China’s 10 biggest tech companies are traded in the U.S. In an effort to compete with New York for offshore listings, Hong Kong’s stock exchange changed its rules to allow “innovative” companies with dual-class share structures, currently banned in the city but favored by many tech firms. The move could pay off almost immediately, with Chinese smartphone-maker Xiaomi Corp. planning an initial public offering in the former British colony. The listing could be the biggest IPO globally since Alibaba went public in 2014.

China is the most active stock market in Asia, powered each day by millions of retail investors, but it’s dwarfed by the U.S. The introduction of CDRs, coupled with continued efforts to open the mainland to foreigners -- such as the inclusion of Chinese-listed stocks in MSCI Inc.’s global benchmarks later this year -- could help close the gap.

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