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London Shanghai Stock Connect – What to Expect

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Category: Economy & Trade
aerial view of London - London Shanghai Stock Connect

June 17th 2019 marked the commencement of the London-Shanghai Stock Connect for trading, increasing global connectivity and further Beijing’s objective of opening China’s capital market.

Take a look at some of our previous articles: China’s seven priority areas in economic work for 2019

For the first time, Chinese companies can list their stocks on both the domestic market and internationally on the London Stock Exchange (LSE). Described as “groundbreaking” by LSE chancellor Phillip Hammond, Chinese companies can now look abroad for financing through a second listing. A two-way depository receipt scheme that bypasses the issue of time differences will now allow the world’s two largest capital markets to be connected.

UK Investors Look Towards China

The move provides the UK with an opportunity to strengthen ties with a quickly developing economy such as China, especially during a time of uncertainty. In hopes of replacing some of the lost listings cause by the Brexit, the LSE expects to use the scheme to generate momentum and brace for the impacts of Britain’s split from the European Union.

Through the London-Shanghai Stock Connect, investors can diversify their portfolio and invest in A-Share Chinese companies that previously had been off limits for a variety of reasons including regulatory restrictions and the inconvertibility of the RMB. A Shares are stocks of Chinese companies that are traded on the two mainland China stock exchanges, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE). Connecting SSE and LSE allows these A Shares to be dually listed. In addition, it is expected to make the Chinese capital market more accessible to small to mid-sized UK-based investors.

While London based investors can already buy through the Shanghai Hong Kong link, trading is limited to RMB. The new scheme makes the trading available in USD and BP.

Therefore, it is likely that these less sophisticated investors will take advantage of the opportunity, as the cost and barrier of entry are now lower. This is beneficial to Shanghai as well, as it will broaden the SSE’s international investor pool.

International Opportunities for Chinese Businesses

From the Chinese business side, investors expect that this scheme will have a variety of effects.

First and foremost, it could “open the floodgates for dozens of mainland Chinese firms to rise funds of the European bourse” says the South China Morning Post.

Goldman Sachs Group Inc. analysis anticipate that this opportunity will be embraced most quickly by blue-chip businesses who already have experience trading on the domestic market and are looking for opportunity to expand.

HuaTai Securities was the first business to list through the connect, making its the debut listing on July 17th. They raised an additional US$1.54 billion through the sale of depository recipients, which they will use to expand business internationally.

Shifting Away From the US?

Previously, many Chinese companies interested in globalizing and building an international brand have chosen to list their companies in the US. For example, two Chinese tech giants, Alibaba and Baidu, both opted to IPO on the NYSE.

The London-Shanghai Stock Connect could also generate more listings on the SSE, shifting the attention away from the US, and towards Shanghai as an international financial center.

Additional Expected Impacts

• Foreign companies listed in the UK have the opportunity to sell stock on the mainland Chinese market which will broaden their investor base
• Chinese investors will have access to international companies without the restrictions of Chinese capital controls
• Boost the Chinese stock market, which performed poorly the previous year and has continued to plunge due to the Sino-US trade war. More on the trade war here.
• Global index providers plan on increasing the weightings of Chinese A Shares in their global benchmarks
• Establish precedence and serve as a model for future links between China and other international capital markets

On their website, the Shanghai Stock Exchange comments on the impact of the scheme, “[the] Shanghai-London Stock Connect is an important initiative to deepen China-UK financial cooperation and expand the two-way opening up of China’s capital market.”

Conclusion

The launch of the London Shanghai Stock Connect is another milestone for Beijing, who has been loosening market access regulations to attract international enterprises and investors. It also works towards China’s goal to establish the RMB as an international currency. This points to the globalized direction China’s economy is heading in, and from these changes, we can anticipate that Beijing will continue to ease regulations making it easier for international entities to participate in China’s economy.

To learn more about how to take advantage of this new opportunity, contact our corporate finance team who extensive experience with securities offering through IPO and private equity in Asia.

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