Only six months ago, experts were railing against London-Shanghai Stock Connect, deriding it as totally unfeasible citing time-zone challenges, Chinese curbs on short selling, the use of RMB in settlements, capital controls and frequent share trading suspensions on the mainland.
The scheme was a nice idea, but not a tangible one, or so the thinking went. Those cynics have been dumbfounded, as it now looks likely that London-Shanghai Stock Connect will be up and running imminently, with a go-live date pencilled in for December.
“The China Securities Regulatory Commission (CSRC) has published the final governing rules, while Shanghai Stock Exchange (SSE) and China Securities Depository and Clearing Corporation (CSDCC) have both released draft rules with detailed guidance in areas such as listing, trading, cross-border conversion and account openings. We are confident these draft provisions will be finalised shortly,” said Margaret Harwood-Jones, global head of securities services and transaction banking at Standard Chartered, speaking at SIBOS in Sydney.
The London-Shanghai take on Stock Connect is conspicuously different to the Hong Kong-Shanghai Stock Connect, which launched in 2014. “The purpose of London-Shanghai Stock Connect is to facilitate cross-border listings of selected issuers in both markets. The major difference is that the latest scheme brings UK issuers to China’s investor market through Chinese Depositary Receipts (CDR), and Chinese issuers to London via Global Depository Receipts (GDR). Brokers in each market will create the CDRs and GDRs,” she explained.
Gauging mainland investor interest in the latest Connect scheme is not straightforward as it has yet to launch, but also because local market conditions – namely capital controls – could act as a deterrent. “However, there are high quality blue chips which could be attractive as GDRs that list and trade in London as some investors may want single line exposure to China’s issuers, rather than having exposure to the entire market,” said Harwood-Jones.
There are a handful of outstanding issues which still need to be ironed out. “There are some cross-border trading and operational issues because of the differences in the settlement cycle and movement of funds between the two markets, which are being fixed. The stock exchanges, central securities depositories (CSDs) and depository receipt banks are actively involved in setting the framework and addressing these issues. We believe a resolution will be forthcoming before the official launch of the scheme,” she added.
China’s regulators have been busy over the last few years, expanding foreign investor access channels to mainland bond and equity markets.
The reforms are far from complete, with a number of other Connect-esque initiatives in the pipeline between China and Hong Kong, including ETF (exchange traded fund) Connect and Primary Connect, the latter of which will enable investors to subscribe to initial public offerings (IPOs) in both markets.