(Yicai Global) June 21 -- Six Chinese fund providers have each raised between CNY10 billion (USD1.5 billion) and CNY30 billion as they look to purchase upcoming China Depositary Receipts from some of the country's biggest tech firms.
The government limit for the funds is CNY50 billion, an insider at one of the companies told Yicai Global. The funds are eagerly waiting for tech titans like Alibaba Group Holding, Baidu and JD.Com to issue yuan-denominated shares on the Chinese mainland, granting local investors the chance to buy into their success.
Despite broad enthusiasm for the CDR listings, the mainland stock markets are looking somewhat stale after United States President Donald Trump threatened earlier this week to add a 10 percent tariff to USD200 billion worth of Chinese goods on June 19. The new measures come on top of a 25 percent tax on USD50 billion of Chinese imports announced on June 15.
China responded by accusing America of violating market laws as the Shanghai bourse's benchmark, the Shanghai Composite Index, slumped 3.78 percent and hit a two-year low in intraday trading.
Riding the Unicorns
The main aim of the new funds is to support the local listings of the overseas listed tech firms. The companies already have huge market caps in their listings abroad, so could benefit from a pool of large-scale institutional investors setting an appropriate valuation once they list back home to avoid excessive volatility.
The three-year lockup period attached to the CDRs is a positive, said an insider at a leading public fund provider in Shanghai. He believes that the newly-raised cash will help boost his firm's status in the sector. These three years will serve as a trial period for the company, and if its new unicorn fund posts a solid performance it will likely offer more funds to the public.
The successful issuance of these six funds in such a sluggish market environment has strengthened market confidence that these funds will deliver decent returns in future, but it remains to be seen what kind of returns they will actually generate.
The funds will focus on buying into share placements and bonds, and as there will be few companies qualified for them to invest in early doors, primary investments will go into bonds.
They will invest between 85 percent and 90 percent of their money in bonds this year, said Han Zhenguo, an analyst at Founder Securities. But this will fall as more qualified target companies list on the mainland, he added.
Even though the funds are only investing in bonds and share placements, they are not without risk. The three-year lockup means that they will only bear fruit if the companies they invest in have continued success after the placement, they will not benefit from the likely initial surge when the companies first list.
Editor: James Boynton