Questions remain as countdown begins on depositary receipts with Chinese characteristics

As the clock starts ticking down on the July debut of Xiaomi’s Chinese depositary receipts (CDRs) on the Shanghai Stock Exchange, a raft of questions remain unanswered on some of the most basic aspects of how the new financial instrument would function.

The ability of CDRs to be converted into their underlying stocks; the channels by which retail investors can trade them; the choice of the bourses for hosting them; down to the accounting treatment to reconcile global accounting standards with Chinese rules; and contradictory governance regulations - are all adding up to make Xiaomi’s debut a closely watched case study in the evolution of China’s financial system.

The stakes are high. Poised to celebrate four decades of taking China’s communist system of governance down the road of capitalist market reforms, the government is keen to showcase CDRs as a way for the country’s investors to partake in their largest - and most highly valued - corporate successes.

“The CDR pilot programme is introduced to make China’s financial system more inclusive and competitive, to make preparations and explore new measure for more systematic changes in China,” said Li Chao, vice-chairman of the China Securities Regulatory Commission, during a June 10 forum in Shenzhen.

At least another five Chinese technology companies are in the queue to raise a combined US$60 billion through CDRs, according to an Goldman Sachs estimate.