Regulator releases CDR, IPO rules to boost mainland stock market

China's securities regulator released rules on China Depositary Receipts and initial public offerings on Wednesday night, a move to expand channels for innovative companies to list on the mainland's A-share market.

CDRs, similar to American depositary receipts, allow domestic investors to hold and trade shares in companies that are listed overseas.

Qualified innovative firms are now able to submit applications for CDR issuance to the China Securities Regulatory Commission, as part of the pilot program launched on Thursday. The CSRC said the regulations lay the institutional foundation for innovative firms to issue CDRs in the domestic capital market.

"We will strictly control the number of companies and the volume of funding for the pilot CDR program, and will properly arrange the timing and pace of CDR issuance," the commission said.

China plans to woo overseas listed Chinese firms back to the domestic A-share market with the introduction of the Chinese depositary receipts system, especially major tech companies such as Tencent Holdings Ltd, Alibaba Group Holding Ltd, Baidu Inc, JD and NetEase Inc.

Meanwhile, the CSRC's changes to IPO regulations relax the financial performance requirements that companies must meet before listing. Qualified innovative firms applying for IPOs on mainland bourses' main boards will not need to report positive net profit in the latest three consecutive years and three-year net profit totaling more than 30 million yuan ($4.7 million).

On the Shenzhen Stock Exchange's ChiNext board, the IPO requirements of positive net profit in the latest two consecutive years and two-year net profit totaling 10 million yuan will be exempted for innovative companies during the pilot trial.

The commission also announced measures to support innovative firms in their domestic issuance of stocks or CDRs.

"This is a very important signal indicating that China is expanding listing channels for innovative companies," said Dong Dengxin, a finance professor at the Wuhan University of Science and Technology.

Dong said China's securities regulator pays attention to companies' past performance when approving IPO applications, and is attaching more importance to the future of innovative companies.

He added that Chinese regulators have become more open and inclusive in order to embrace innovation and bring vitality to the Chinese stock market.

"Reports that China is accelerating the pace of CDR listings did not exceed market expectations and as a result the stock market performance on Thursday remained lackluster," said Hong Hao, chief strategist at BOCOM International Holdings Co.

The benchmark Shanghai Composite Index declined by 0.18 percent to 3109.50 points. The Shenzhen Component Index decreased by 0.49 percent, while the ChiNext startup index fell 0.74 percent.