It has been a long time coming and pretty soon it could be here: a stock trading scheme linking Shanghai with London, some 9,000 kilometres away.
However, unlike its more established Shanghai-Hong Kong namesake, the Shanghai-London Stock Connect programme will only allow investors in each market to buy stocks indirectly in the form of depository receipts, a consultation paper shows.
Expected before the end of the year, Shanghai-London Stock Connect will enable investors in either country to invest in companies listed in the other, providing these companies have a secondary depositary receipt listing in place.
With Shanghai-Hong Kong Connect (and its Hong Kong-Shenzhen sister scheme), in contrast, Chinese investors can buy Hong Kong-listed stocks directly under daily quotas.
Under the London-Shanghai Stock Connect, foreign companies will be allowed to list their shares on the onshore Chinese market, which will potentially become more internationalised as a result, Melody Yang, partner at law firm Simmons & Simmons, told AsianInvestor.
Although it is unclear how interested London-listed firms will be to reach out to a new type of shareholder in this way, the Connect programme should theoretically help domestic Chinese investors turn their portfolios into more global ones with less regulatory and foreign exchange risk.
That should enable them to get the investment benefits of geographical diversification whilst trading in their own market under familiar settlement and clearance conditions.
Allowing more international companies to list on the domestic market could also attract more non-Chinese investors from elsewhere in Asia, thus improving the investor base and liquidity of the A-share market.
The new Connect scheme will likely be launched at this year’s UK-China Economic and Financial Dialogue, usually held in November or December, and was agreed in principle at a previous gathering in 2015, Ricco Zhang, Hong Kong-based director for Asia Pacific at the International Capital Market Association, told AsianInvestor.
Yi Gang, governor of the People's Bank of China, also said at the Boao Forum in April that the London-Shanghai Stock Connect scheme would be launched this year.
CAPITAL MARKET REFORM
Zhang believes the Chinese authorities hope to reform the A-share market with the proposed Stock Connect programme.
“Previously, the market was open for others [foreign investors] to invest in. Now, authorities allow others [foreign issuers] to try to list and trade their shares,” he said.
For Zhang, London-Shanghai Connect is meant to “test the water” – it is a pilot programme for an international board in Shanghai, something that had been discussed as far back as 2009 when the ChiNext board was launched in Shenzhen but was subsequently placed on the backburner.
Under the proposed Stock Connect scheme, London-listed firms will be able to issue China Depository Receipts (CDRs) in the Shanghai A share market. These CDRs have to be backed by the issuers’ existing shares, meaning they cannot raise fresh funds through them.
Meanwhile, Shanghai-listed companies will be able to issue Global Depository Receipts (GDRs) in London. These GDRs, in contrast, can be backed by new shares, which would effectively enable Chinese issuers to raise fresh money if they wanted to.
It’s not a reciprocal arrangement, and the terms have been negotiated according to the business needs of both sides, Iris Pang, Greater China economist at ING Bank, told AsianInvestor.
The deadline for public feedback to the various proposals put forward by the China Securities Regulatory Commission is September 15.
The CSRC has also set some initial rules covering GDRs issued by Chinese companies. Highlights are as below:
- Domestic companies issuing GDRs will be regulated much like domestic companies listing overseas.
- The issuing price of GDRs should not be lower than 90% of the weighted average closing price in the 20 trading days prior to pricing.
- GDRs listed for the first time cannot be converted into A shares within the first six months of issuance.
- When a foreign company has equity ownership in a China-listed company through both GDRs and A-shares, these holdings should be consolidated to determine if the limit on foreign ownership is met.
For more insights on investing in China, AsianInvestor is hosting its fifth China Global Investment Forum in Beijing on September 13. For more details, visit the website or contact us on +852 2122 5262.