What Does Chinese Depositary Receipt Mean?

A Chinese Depositary Receipt (CDR) is a type of depositary receipt (DR) that is traded on a Chinese stock exchange. A DR is a certificate issued by a bank that represents equity in foreign companies. Therefore, a CDR is a certificate issued by a custodian bank that represents a pool of foreign equity that is traded on Chinese exchanges.

Understanding Chinese Depositary Receipts (CDRs)

Chinese regulators have modeled CDRs after U.S.-listed American depositary receipts so that overseas stocks could be traded on China’s mainland market. The goal of issuing CDRs is to lure capital back to the Chinese market in order to drive the economy, as China’s tech giants have traditionally opted to list outside of their home market. The issuance of CDRs allows both Chinese institutional and private investors to own stock in foreign companies.

What is a Depositary Receipt (DR)

Depositary receipts originated in the United States in the 1920s. Under a depositary receipts system, a portion of a company’s shares are transferred to a custodian bank, which acts as a middleman broker, which then sells the shares on an exchange outside of the country. While depositary receipts are not technically shares, they allow investors to hold shares listed elsewhere through the custodian bank.

Why Chinese Companies Have Listed Overseas

A large number of Chinese technology companies have listed overseas in the past to avoid the legal and technical barriers to IPOs they would encounter on the mainland, as well as to gain access to international investors and bond markets. The IPO restrictions include those on weighted voting rights and mandatory requirements on applicants’ profitability. Additionally, the larger Chinese firms are often incorporated in places such as Cayman Islands to bypass China’s securities requirements and get access to foreign capital markets.

The Advantages of CDRs

CDRs give domestic investors a way to invest in Chinese firms that are listed overseas. China has brought forth some of the world’s fastest-growing technology businesses; however, Chinese investors have been unable to share the gains. Also, the country misses out on the future growth that these stocks earn when they list on a foreign exchange, so CDRs offer a way for that growth to come back to China. In fact, the potential scale of a CDR market could pass a trillion dollars.