Introducing Chinese depositary receipts to accommodate red-chips: context, functioning, barriers and implications

Having developed into a market of global size over the past three decades, the Chinese securities market has nonetheless missed many red-chips due to its long-standing taboo on such issuers. Against the backdrop of global regulatory competition and its economic downturn, however, China has recently turned to enfranchise red-chips to float domestically with the introduction of Chinese depositary receipts to serve as the listing and trading instrument, thus catching the spotlight on the functioning and effectiveness of this regulatory shift in promoting market development. This article examines China’s regulatory reform of introducing Chinese depositary receipts to accommodate red-chips, canvassing the functioning of this regulatory shift, exploring the post-reform market landscape based on hand-collected data, looking into the regulatory barriers and seeking policy implications in the context of regulatory competition. This article finds red-chips’ sparse domestic flotation with the use of Chinese depositary receipts in the post-reform era and suggests policymakers relax the market entry regulation and construct a Sino-Hong Kong common securities market based on stock connects to accommodate red-chips.