London's Shanghai Stock Connect Dream Is a Bridge to Nowhere
(Bloomberg Gadfly) -- Will you cross a bridge if you don't know what's on the other side? Unlikely.
That's the dilemma investors face as they look forward to the London-Shanghai Connect stock trading link that's scheduled to start by year-end. The program's timing was announced this week by People's Bank of China Governor Yi Gang, who also said authorities will quadruple daily trading limits on the mainland's existing share trading pipes with Hong Kong.
Two words explain why a London Connect is problematic: home bias.
Once you allow investors on both sides to trade in each other's markets, the question becomes: Has your average Londoner heard of Kweichow Moutai Co., the distiller of baijiu that's now more valuable than McDonald's Corp.; or how famous among Shanghai retail investors is BP Plc, one of the largest stocks on the FTSE 100 Index?
The biggest of the FTSE components, HSBC Holdings Plc, is a big name in China. But mainland investors seeking a stake in the largest foreign bank in the mainland can already do so by buying its Hong Kong-traded shares through the Shanghai or Shenzhen Connect. In fact, they already account for 6 percent of HSBC's Hong Kong-listed market value.
The reverse holds true for international investors wanting mainland stocks: Why buy Moutai via the London Connect when it's already available through Hong Kong, a free market open to traders worldwide?
There's scant evidence that British punters are clamoring to buy Chinese shares. The four Hong Kong-traded Chinese stocks with dual listings in London -- Air China Ltd., Sunny Optical Technology Group Co., Datang International Power Generation Co. and Zhejiang Expressway Co. -- have barely any trading volume in the British capital, Morgan Stanley notes.
Even the Shanghai and Shenzhen pipes with Hong Kong aren't busy. Less than 15 percent of the daily quota on both links gets used up on average, according to the New York-based investment bank.
That may change starting in May, when mainland stocks are included in the MSCI Emerging Markets Index, causing billions of dollars of passive funds to be rerouted to China. Still, heavy trading may be years away. Activity via the London-Shanghai Connect is likely to be even more moribund.
Beyond the problem of name recognition, there are numerous technical challenges. Take the time difference: China is seven or eight hours ahead of the U.K. depending on the time of year, meaning much trading in Shanghai and Shenzhen takes place when London is asleep, and vice-versa. Some brokers may have night desks, but the average London or Chinese investor may struggle to find intermediaries.
China's semi-fixed currency and continued capital controls are another hurdle. London will find clearing yuan trades more difficult than Hong Kong, which has a bigger supply of the currency. And regulators in London and Shanghai will lack the open information channels that China has with Hong Kong.
In summary, any link will probably be a watered-down version of the Hong Kong programs.
With Brexit looming, it's understandable that London is keen to cozy up to China and forge links with the world's second-largest economy. This connect, though, is a bridge to nowhere.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.
To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net.
©2018 Bloomberg L.P.