China Sets Share-Swap Limits for London-Shanghai Stock Link

(Bloomberg) -- China published proposed rules for the link between stock exchanges in London and Shanghai, outlining how the long-discussed project will work in tandem with the country’s capital controls.

Companies seeking to take part will need to meet thresholds including a minimum value, and there will be limits on how many securities can be issued and how they’ll be traded between markets, according to statements from the China Securities Regulatory Commission and Shanghai Stock Exchange. The system will see listed firms from each nation sell depositary receipts in the other’s country.

The London link is part of the broader effort by Chinese authorities to increase access to the country’s financial system. In the works since at least September 2015, the program will give offshore investors the chance to buy Shanghai-listed companies via the London Stock Exchange. As with other steps to open up their markets, policy makers have set boundaries that keep controls over cross-border money flows in place.

“Although the initial listing/trading volume under the Shanghai-London Stock Connect could be small, we still see it as another step forward in reforms to further open up China’s capital market,” Goldman Sachs Group Inc. analysts including Weicheng Tang and Tian Lu wrote in a note published Monday.

Investors won’t be able to swap their London-listed depositary receipts for company stock for at least six months after a new listing, according to the plans published Friday, and conversions will be subject to a quota, the details of which haven’t been made public. Restricting investors’ ability to swap shares in one market for those in the other was one of the conditions Chinese regulators had sought, people with knowledge of the matter said last month.

“Internationally well-known blue chips with high market value and good liquidity will likely be selected to test the stock link in the beginning,” Wang Hanfeng and his team at China International Capital Corp. wrote in a note published Monday.

Among other proposals outlined in Friday’s statements:

  • Chinese companies will be allowed to use depositary receipts in London to raise new capital, but U.K.-listed firms can only issue depositary receipts in Shanghai using existing shares
  • The number of depositary receipts issued by a company will be subject to a cap, though details weren’t provided
  • Secondary listings in London must be priced at a minimum 90 percent of the Shanghai-listed stock’s average closing price over the previous 20 trading days

The rules are open for public feedback until Sept. 15, the CSRC said.

People’s Bank of China Governor Yi Gang said in April that China aimed to launch the link this year, timing that was reiterated by Premier Li Keqiang during an official visit by the British Foreign Secretary Jeremy Hunt in July.

The CSRC also said Friday it may consider revising company law to allow shares with different voting rights. The issue of dual-class stocks has been a hurdle for Chinese startup founders who wish to stay in control after they go public, and has seen many of the country’s leading technology firms head to the U.S. and, more recently in the case of Xiaomi Corp., Hong Kong.

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