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The risk of China ADRs

What ADRs are, what specifics to watch out for from a lawyer's perspective, and how I see the situation now.

Access to the Chinese mainland equity markets with A-shares is restricted for foreigners. Therefore, many Chinese companies have issued other types of shares and ADRs. However, an ADR (American Depositary Receipt) is actually just a certificate that gives the right to buy a share. This results in limited rights. In the worst case, the company could change the rules for the certificate, making the ADRs worthless to the holders. The construction of Chinese ADRs makes this easy in that they relate to offshore companies that are only linked to the actual company through intermediate holding companies.

The major Chinese corporations now have secondary listings on the Hong Kong Stock Exchange. The Hong Kong ADRs could be exchanged for shares also listed in Hong Kong within two business days. CITI Group has already indicated this possibility in 2019:

"Upon completion of the HK IPO, Alibaba Group Holding Limited's ("Alibaba") Hong Kong ordinary shares (HK shares) and NYSE-traded ADSs (ADSs) will be fully fungible and will be able to be freely converted in both directions. The conversion process will generally be completed electronically within 2 HK/US business days under normal circumstances."


Further links:

The China fund provider Qilin Capital has completely exited New York ADRs. But this is not because the ADRs are too risky. Rather, the U.S.-China conflicts that affect the objective market valuation of the companies concerned are a thorn in its side. For dual-listed mega-caps, the risk of illiquidity is zero after the daily possible exchange.

TENCENT: Large portfolio, attractive valuation

The Internet giant has exposure to growing markets such as gaming, social media, e-commerce and payment services. Government actions such as restricting video game time among children drew attention away from the good operating performance. Those willing to take risks and speculate on a recovery in China are betting on the broad-based giant.

ALIBABA: Possible comeback at an equally attractive valuation

The last set of figures revealed weakening growth, and the company has also been the focus of regulatory action more often. The chart looks accordingly. Recent statements by the Chinese government give hope that China stocks will calm down, and the valuation is now very attractive. Despite the risk, the share is worth a short-term bet for the courageous at the current level.


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