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CDR to benefit all

The high expectation for the CDR goes beyond facilitating the return of red chips to their home market. The investment tool would open the door for foreign companies listed overseas to list in Shanghai.

"We hope the Chinese securities regulator introduces the tool as soon as possible, as it is a very good channel to link the Chinese capital market with the overseas market," said Raymond NG, a partner at Ernest & Young.

"With it, Chinese investors would be able to buy stocks issued by foreign companies."

The introduction of the CDR would not only benefit overseas-listed companies and domestic investors, but also domestic brokerages and banks.

"Brokerages could expand their businesses by underwriting and trading CDRs," said Cheng Weiqing, an analyst with CITIC Securities. "Banks could also share the profits from CDR issues."

But one analyst said the Chinese stock market was not ready for the CDR.

"The current foreign exchange administration system does not allow the free trade of renminbi with foreign currency under the capital account, which might make it hard to shift companies' shares to CDRs," said Zhai Qijie, a professor at Nanjing Industry University.

"And the trustee law in China is not mature either."

But China Galaxy Securities' Wang said these obstacles could be overcome if the Chinese government wanted red chips to return.

"They are only technical problems," Wang said. "New mechanisms such as the QFII, QDII, and the A+H models were all fresh to the Chinese capital market, but once they were introduced, investors got to know them It is very possible for the CDR to be issued in 2007."

The massive inflow of money to the A-share market has created great demand for new share issues, heightening the need to introduce the CDR.

The excessive inflow of capital to the stock market is inflating prices in the A-share blue chips. The A-shares of companies such as China Life, the Industrial and Commercial Bank of China, and Bank of China, are traded at over 30 percent higher than their H shares.

These significant increases signal an imbalance in supply and demand.

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