Listing Market Liberalisation: The London-Shanghai Stock-Connect goes live!
July 10, 2019
2 min read
What's going on here?
The long-awaited London-Shanghai Stock Connect finally launched in June, allowing UK and Chinese listed companies to trade on each other’s stock market.
What does this mean?
The London-Shanghai Stock Connect, a project that has taken four years to prepare, now allows listed companies on the Shanghai Stock Exchange and the London Stock Exchange to trade ‘depository receipts’ (DRs). These are financial instruments that represent ownership of company shares held by a custodian bank. DRs are used as an alternative to trading direct shares to account for the time difference between the two countries. Under the cross-listing mechanism of the London-Shanghai Stock Connect, Chinese listed firms will be able to issue Global Depository receipts (GDRs) in London, whilst U.K. listed firms will issue Chinese depository receipts (CDRs) in Shanghai.
This mechanism is predicted to have far-reaching implications in liberalising and expanding China’s channels for foreign investment in Western markets. Indeed, the Alibaba-backed securities firm Huatai Securities Co Ltd. has already taken advantage of this; the firm successfully raised USD $1.5 billion in London on the Stock Connect’s first day. For the U.K., the launch of the Stock Connect will allow international investors to access Chinese A-Shares from outside Greater China. Previously, trading in Chinese A-shares was only accessible either via Foreign Qualified Investor Programs or intercity Stock Connect schemes en route from Hong Kong (e.g. Shanghai-Hong Kong or Shenzhen-Hong Kong Stock Connect).
What's the big picture effect?
For the U.K., this represents a vote of confidence in London’s status as a global financial centre, despite the looming threat of Brexit. For China, it is an opportunity for wealthy Chinese investors to access London’s global capital markets, and to encourage the establishment of Shanghai as a financial hub. This would mean it challenges regional competitor Hong Kong. Therefore, the biggest immediate impact of the launch is the creation of a more interwoven economic tie between the U.K. and China which will result in a boost in both cities’ capital markets.
On a broader scale, this marks a further push by Beijing to liberate its capital markets (this Stock Connect scheme being one of many initiatives), tilting the Yuan as a major trading currency on the global market. Further, with the slowing pace of US investment in China, opening doors to alternative investment routes into Europe is much welcomed, serving a timely response to the US-China trade war. Despite optimistic tones however, reporters from the Financial Times note the London-Shanghai Stock Connect still faces incompatibility issues. These include the trading limits and minimum capital requirements imposed in Shanghai, suggesting any capital gains may not be as evident from the get go.
Overall, it remains to be seen how the London-Shanghai Stock Connect will fare long term, but given China’s express desire to internationalise and expand with other Stock-Connect schemes later this year, this is a space worth watching!
Report written by Roslyn Lai
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