The three companies are willing to return to the domestic market, but Tencent might not.
During the past few months, especially during China's annual meetings of the National People's Congress and the Chinese People's Political Consultative Conference in March 2018, the return of some of the Chinese Internet giants to the domestic stock market has become a topic of hot debate. During these meetings, the chairman of the China Securities Regulatory Commission, Liu Shiyu expressed his regret that China has not taken part in the development and growth of these companies. He hoped this situation would not continue in the future, in China’s “New Era”.
Due to China’s regulation regarding foreign investment, the largest Chinese internet companies are not listed on the domestic stock market. Some of these companies have a Variable Interest Entity (VIE) structure, which allows foreign parties to invest in sectors which are restricted by China’s industrial policy to foreign investment. In this workaround structure, there is a “Controlling Company”, which is partially foreign-owned, and an “Operation Company” that has the permit to operate in the sector. Since foreign investors cannot directly invest in the Operation Company, they invest in the Controlling Company, which de facto holds control over the Operation Company.
This structure has made it possible for Chinese companies to obtain financing from overseas but has also blocked them from entering the domestic stock market because they are considered foreign companies. Both the Chinese government and the Internet companies consider the current legal framework inadequate, so it has long been expected that reforms would eventually take place.
The founders of Baidu (Robin Li), Tencent (Ma Huateng) and Jingdong (Liu Qiangdong) expressed their willingness to “return home” during the Two Sessions last March. Robin Li told the press: “After all, the vast majority of our customers and markets are in China, so being listed on the Chinese market would be the ideal situation for us”. Liu Qiangdong said that Jingdong would return to China as soon as regulations allowed it. Tencent’s Ma Huateng was more cautious and manifested his willingness to consider it only when the right time came.
China Securities Regulatory Commission promised to undertake reforms to increase the tolerance and adaptability of the Chinese market. The regulatory body also manifested their support for tech companies and their willingness to modernize China’s economic system. Last February, the official Chinese news agency, Xinhua, published an article that advocated for the elimination of the barriers that many Internet companies face in Mainland China.
Also, China Securities Regulatory Commission designed a return-home pilot scheme for Chinese companies with a market valuation of over USD 200 billion listed on foreign stock exchanges. The idea, which was enthusiastically supported by the State Council, emphasized the importance of the new economy and the new concept of companies. The regulatory body announced that Alibaba, Baidu, Jingdong, Netease, China Telecom, China Mobile and another six organizations met the requirements for inclusion in the project.
Baidu, Alibaba and Jingdong will return to the Chinese stock market using CDR (Chinese Depositary Receipt) and they will not issue new shares. Thanks to their firms’ stock structure, Liu Qiandong, Robin Li and Jack Ma do not need to worry about losing control of their respective companies. However, Tencent has a one share-one vote structure, which makes Ma Huateng´s grip on the company more fragile. Also, Tencent is already listed on the Hong Kong stock exchange, so there is little point getting anxious about returning to Mainland China.
The return of Baidu, Jingdong and Alibaba to Mainland China will be a threat to companies like 360, Keda Xunfei and other tech companies which are already listed on the Chinese stock market. If the top players are coming back home, their shares will probably fall sharply.