The link-up between the London and Shanghai stock exchanges has begun taking shape in preparation for going live before the end of this year.
According to a report by Bloomberg the LSE will start allowing Chinese companies to sell global depository receipts (GDRs) in the UK on what the LSE calls the Shanghai Board with shares initially traded in dollars and later in yuan and in pounds. It will be possible to buy and sell Chinese firms that are already listed in Shanghai and are worth more than $3.1 billion. The trading hours will be similar to the actual LSE trading hours – between 9 am and 4.30 pm London time. The companies will be able to issue up to 15% of their total share in the UK.
So what is new here?
It is already possible to trade shares of Chinese companies outside of mainland China – for instance there are over 130 Chinese firms listed on Nasdaq and on the New York Stock Exchange with a total value estimated at more than $1.4 trillion. What is different with the London-Shanghai link is that it will allow trade in both directions.
After years of slow progress – first discussions took place in 2015 – things are now moving at speed because they are being pushed from up above. The UK government is keen to see the project go live as soon as possible for several reasons: it will attract Chinese companies into the London market, it will firm up London’s top position as the main centre for trading the Chinese currency outside of Asia and it is likely to more than make up for some of the loss of the Russian business brought on by the recently intensified sanctions on Russian firms.
Stock Connect: part of China’s bigger strategy
From China’s side the Stock Connect is part of a bigger strategy of opening up its financial markets which include measures such as allowing foreign ownership of a 51% controlling stake in Chinese firms and the Hong Kong – Shanghai Stock Connect, a predecessor to the London project. People’s Bank of China Governor Yi Gang said in April he expected the link to start operating by the end of this year.
What remains to be seen is who will trade the GDRs. For instance East Capital, a Swedish investment firm with a keen nose for emerging markets which managed to get returns of over 100% on some its investments in Russian companies in the early 1990-ties has already relocated some of its top staff to Hong Kong to gain better access to the Chinese market.
It will also be interesting to see if London stocks manage to attract the interest of Chinese buyers who are keen speculators and tend to be very active in the market but have traditionally looked at stocks at home rather than abroad.
