The United Kingdom and China are planning to link their stock exchanges, which will be known as the London-Shanghai Stock Connect. The negotiation began in 2015 when the two countries decided to widen the capital raising horizons for companies and open their equity markets. The link is symbolic of inviting more foreign investment participation at both ends.
In China, the move sparked legit doubts around capital outflow surge from the country. Excess of listings from the London Stock exchange would drain the liquidity of the existing A-share holdings and the stakeholders suggested to keep financial stability as the priority. Beijing also wanted to ensure the stability of the A-share market and thus assured of a restrictive liberalisation drive.
In September 2018, the China Securities Regulatory Commission published the draft rules that would govern the new cross-border trade system. Accordingly, due to different time zones, many experts hardly consider this to be an essential trading link. Nonetheless, the link will allow Chinese companies to raise capital in Europe’s largest equity market while the LSE listed companies will be able to issue shares but not raise fresh capital in China. Essentially, the British firms will only sell Chinese depository receipts on the Shanghai exchange, while the Chinese companies will be allowed to issue global depository receipts (GDRs) in London.
The initiative is an advantageous one for both the countries. China is known for its strict capital controls that limit the flexibility of moving funds in and out of the domestic system. Thus, access to the financial markets is only possible through official trade channels and investment quotas that it has with other countries. Since China is quickly becoming a prominent consumption market for various international companies, it’s a lucrative opportunity for many firms to gain some brand marketing.
However, the provisions will only expose a limited number of shares to the investors. The speculation is that only the blue-chip companies with huge market capitalisation of at least USD2.9 billion and profits will be selected by the Commission to issue depository receipts on the LSE. So far, the big names like Huatai Securities Company, Bluestar Adisseo Company, and HSBC Holdings Plc have been shortlisted to take up the opportunity. On the other side, to be able to issue depositary receipts in Shanghai, the potential UK firms need to be listed for at least three years on LSE.
Furthermore, the Chinese investors will require a minimum CNY3 million in securities and fund accounts to qualify for buying the UK GDRs. As for the Chinese companies aspiring to raise capital from new shares on LSE, a maximum of 15% share capital will be allowed for issuance.
So, evidently, there are many constraints governing the dynamics of the new Stock Connect. China is avoiding a drastic loosening of its capital controls and only going for a mild international linkage to the European financial markets in lieu of the same advantage to LSE listed firms.
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