Chinese Depositary Receipts: Attracting The Listing Of Tech Unicorn Companies Through Securities Law Reform

By | September 13, 2018

Courtesy of Lerong Lu and Ningyao Ye[1]

Recent reforms to Chinese securities law are designed to entice local tech giants to list their shares in mainland China as opposed to overseas markets like Hong Kong or New York. One reform idea is modelled off a long-standing concept in the U.S. and Europe known as depositary receipts. This article will explain why Chinese tech companies currently prefer to list their shares overseas and how Chinese Depositary Receipts (CDRs) may change this decision calculus.


The term unicorn was coined in 2013 by venture capitalist Aileen Lee to describe the scarcity of privately held start-up companies valued at over $1 billion. Thanks to technological innovation and ready access to capital, there are now 248 unicorns around the world, with a total valuation of $826 billion.[2] However, unicorns are concentrated in just a few countries, primarily the U.S. (117) and China (73).

While U.S.-based unicorns have been widely covered by the media, less attention has been paid to those in China. After four decades of economic reforms, China has become the second largest economy in the world and is home to a robust tech industry with many venture capital and private equity firms (a prerequisite for producing unicorns). According to China’s Ministry of Technology, a unicorn is a company that is: (1) incorporated in China with an independent legal entity; (2) less than 10 years old; (3) the recipient of venture capital funding with no  publicly listed shares; and (4) valued at over $1 billion (companies valued at $10 billion or higher are called a super unicorn or decacorn).[3] The following table lists Chinese unicorns in order of valuation as of December 2017.

Ranking Company Valuation ($bn) Industry Founding Headquarter
1 Ant Financial Services Group 75 Internet Finance 2014 Hangzhou
2 Didi Chuxing 56 Car-hailing 2012 Beijing
3 Xiaomi 46 Smartphone 2010 Beijing
4 Alibaba Cloud 39 Cloud Computing 2009 Hangzhou
5 Meituan Dianping 30 E-commerce 2010 Beijing
6 Contemporary Amperex Technology Co. Limited (CATL) 20 New Energy Car 2011 Ningde
6 Toutiao 20 New Media 2012 Beijing
6 China Smart Logistic Network (Cainiao)


20 Logistics 2013 Shenzhen
9 Lufax 18.5 Internet Finance 2011 Shanghai
10 Jiedaibao 10.77 Internet Finance 2014 Beijing

Table 1 Top 10 Unicorn Companies in China[4]

Two former Chinese unicorns, Alibaba, the global e-commerce giant, and Tencent, a leading social networking and online gaming company, are counted among the ten most valuable brands in the world, sitting alongside iconic US companies like Google, Apple, Amazon, Microsoft, and McDonald’s.[5] In addition, Alibaba and Tencent are among the ten most valuable public companies, with respective market capitalizations of $522 billion and $497 billion as of June 15th.

Despite the success of these two companies and the development of China’s capital markets in recent years, most Chinese unicorns that become public list their shares on markets outside of mainland China. In our latest article “Chinese Depositary Receipts: What They Are, How They Work and Why This Represents a Golden Opportunity” we examine the reasons why Chinese tech giants prefer to list their shares on overseas stock markets despite mainland China having two of the largest stock exchanges in the world (Shanghai and Shenzhen). Our key takeaway is that by listing abroad, tech companies avoid the legal and technical barriers to public listings that they would encounter in China, as well as gain access to international capital sources.

Current Setup

Many Chinese tech companies have adopted a variable interest entity (VIE) as their legal business structure. VIEs enable foreign investors to get around Beijing’s restriction on foreign ownership in companies in specific industries such as tech, finance, and education. While Chinese law does not permit foreign capital to own a majority stake in an internet company, these companies often raise considerable funds from foreign venture capital funds and private equity funds. For example, two of the largest shareholders of Alibaba are Softbank (Japan) and Yahoo (U.S.). VIEs, therefore, evade the ownership limitation and allows tech firms to access capital from international investors. In 2014, Alibaba decided to list its shares in New York partly because its use of a VIE had not been accepted by Chinese regulators. Apart from Alibaba, other Chinese tech giants like Baidu, Tencent, Youku, and Sohu have all utilised the VIE structure.

Another controversial issue lies in the dual-class share structure, also known as the weighted voting right. Class A shares that are sold to public investors grant their holder’s one vote per share, while Class B shares that are held by company executives and private equity investors carry ten votes per share. The legal structure benefits the founders of tech firms who maintain absolute control over their company despite not having the majority of shares. Dual-class shares have been widely used by American and Chinese tech companies, such as Google, Facebook, and Snap Inc. For example, Richard Qiangdong Liu, the founder and chairman of Nasdaq-listed JD, a leading online shopping portal in China, owns 23.7% of JD shares but has more than 80% of its voting rights.[6]

While the dual-share structure is favourable for company founders, it may not serve the interests of ordinary shareholders and raises concerns over the abuse of management power. The supporters of such a structure praise it for allowing founders to resist short-termism and defend against hostile takeover bids. Because the Shanghai and Shenzhen stock exchanges do not permit a dual-class structure, they have lost several tech listings to the New York Stock Exchange and Nasdaq.

Finally, China Securities Law requires that a company that plans on issuing new shares to the public must demonstrate sustained profitability and good financial health.[7] The China Securities Regulatory Commission (CSRC)’s IPO regulation further requires that an issuer make positive profits for the three consecutive accounting years prior to the IPO, and the accumulated profits should exceed CNY30m ($4.61m).[8] In contrast, the listing rules in the US are more lax in relation to a company’s profitability – it took Amazon 14 years to turn a profit.

Reform Efforts

In the remaining sections of our article, we discuss and analyse the reform of listing rules in China, in particular, the operating mechanism of Chinese Depositary Receipts (CDRs) as well as relevant laws and regulations. If listed overseas, investors in mainland China are unable to purchase shares of their favourite brands and cannot profit from the extraordinary growth of Chinese tech giants. In 2018, the CSRC launched a pilot scheme to allow certain overseas-listed Chinese companies to issue CDRs, which can be traded on the Shanghai or Shenzhen stock exchanges. CDRs are modelled on American Depositary Receipts (ADRs) and European Depositary Receipts (EDRs), which enable US and European investors to purchase the shares of foreign incorporated companies.

Depositary receipts originated in the U.S. in the 1920s. Under a depositary receipt arrangement, a portion of the issuing company’s shares are transferred to a custodian bank serving as a broker. The custodian bank then sells the shares to investors on a stock exchange outside of the country of incorporation. Technically, CDRs are not shares, but represent equity interests in foreign companies through an onshore custodian bank. The State Council’s guidelines indicate that CDRs will apply to companies in specific sectors such as cloud computing, big data, artificial intelligence, semi-conductors, bio-tech and high-end manufacturing.[9]

The development of CDRs will attract additional capital to Chinese markets, give local investors more options, and boost the market valuation of issuing companies. Given that the CDR market is estimated to eventually reach $1 trillion in size, CDRs will also be a vital source of income for international investment banks and leading commercial law firms for years to come.


The article is available to view from the SSRN at



[1] Dr Lerong Lu, Lecturer in Law, University of Bristol, UK; PhD & LLM (Leeds); LLB (ECUPL); Attorney-at-Law, China; E-mail:

Ningyao Ye, PhD Candidate, School of Law, University of Leeds, UK; LLM (Glasgow); LLB (ECUPL); Email:

[2] CB Insights, “The Complete List of Unicorn Companies”, available at, accessed 1 September 2018.

[3] Securities Times, “2017 China Unicorn Enterprise List”, available at, accessed 1 September 2018.

[4] Securities Times, “Ministry of Technology Issued 2017 China Unicorn Companies Ranking”, available at, accessed 1 September 2018.

[5] David Meyer, “China Now Has 2 of the Top 10 Most Valuable Brands in the World For the First Time”, Fortune (29 May 2018), available at brandz/, accessed 1 September 2018.

[6] Xinhua, “Tencent become the largest shareholder in JD, Liu Qiangdong still has the controlling power” (23 August 2016), available at ttp://, accessed 1 September 2018.

[7] PRC Securities Law 2014, Art 13(2).

[8] CSRC, Measures for the Administration of Initial Public Offering and Listing of Stocks (2006), Art 33(1).

[9] Gabriel Wildau, “China clears path for foreign-listed tech unicorns to return home”, Financial Times (30 March 2018), available at content/60859464-342b-11e8-ae84-494103e73f7f, accessed 1 September 2018.

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