All About the U.K.-China Plan to Link Stock Markets

(Bloomberg) -- The U.K. and China are linking their stock exchanges. The London-Shanghai Stock Connect, as it will be known, will allow companies listed on one venue to issue shares on the other. It’s the latest cross-border push by China to increase access to its financial system and broaden the reach of its companies and currency. But don’t expect a surge in late-night trading.

1. So it’s not a trading link?

Correct -- time zones and rule differences make that all but impossible. The tie-up between the London Stock Exchange and the Shanghai Stock Exchange will, however, give Chinese companies the ability to raise capital in Europe’s largest equity market. London-listed companies will be able to issue shares, but not raise fresh capital, in China. The London end of the link starts June 17, more than six months later than originally expected. Fang Xinghai, vice chairman of the China Securities Regulatory Commission, in a Bloomberg Television interview, had blamed the U.K.’s Brexit distraction for the delay.

2. Which companies will use it?

That’s the big question. To date, only Huatai Securities Co., one of China’s largest brokerages by market value, has won approval from China’s securities regulator to issue global depositary receipts, or GDRs, in London. (GDRs are types of bank certificates that are backed by a domestic share of a foreign company). The firm raised about $1.5 billion from investors and begins trading June 17. Bluestar Adisseo Co., an animal-nutrition firm, was also said to be weighing a London listing. While so far only HSBC Holdings Plc has expressed interest in heading eastbound, Goldman Sachs Group Inc. analysts expect some blue-chip brand names with a long trading history to take up the opportunity. Up to six Chinese and three U.K. firms could be ready to make use of the Connect by mid-year, a person familiar with the application pipeline said in January.

3. Why does China want stock links?

Its strict capital controls limit the funds that people and companies can move in and out of the country. Access to its financial markets is possible only through official channels such as trading links and investment quotas such as the Qualified Foreign Institutional Investor program that began in 2002. China’s flagship link is its stock connect with Hong Kong that opened in 2014. That tie-up allowed investors to trade mainland-listed stocks through Hong Kong, and vice versa. A similar link that opened in July 2017 permits investors to buy Chinese bonds through Hong Kong, though not the other way around.

4. What will the London-Shanghai Connect mean for investors?

That’s another big question. For Chinese traders and fund managers, it’s a chance to buy into some globally renowned companies and broaden their investment universe. The appeal to investors in London is less clear, since many companies that will list in the U.K. are already available to buy through the Hong Kong link. That said, there is a draw for U.K. fund managers who are restricted to purchasing London-listed stocks. Index compilers MSCI Inc. and FTSE Russell have recently warmed to mainland-listed shares, which should translate into higher demand from funds in London. If the link succeeds, it could serve as a template for projects between China and other markets. To be sure, Germany’s China Europe International Exchange has seen only light trading in Chinese-linked securities.

5. What are the rules?

The connect is restricted to shares in companies with a market value of at least 20 billion yuan ($2.9 billion). U.K. candidates must have been listed for at least three years and will be able to issue depositary receipts in Shanghai, according to Chinese state-run media. Chinese investors with a minimum 3 million yuan in securities and fund accounts will be able to buy the U.K. GDRs. As for Chinese companies seeking to raise funds from new shares in the U.K., they will be allowed to issue a maximum 15% of their share capital.

6. What about China’s capital controls?

There will be constraints, such as a cap on the number of GDRs a company can issue. Investors will be able to swap London-listed depositary receipts for company stock in Shanghai, though restrictions will apply. Limitations stem from China’s desire to keep its capital controls in place and not have investors freely exchange yuan-denominated shares for stocks in another currency, according to Fraser Howie, author of “Red Capitalism.”

The Reference Shelf

• Bloomberg Intelligence’s Sharnie Wong says the London link may boost the Hong Kong link.
• “A bridge to nowhere.” That’s the verdict of Bloomberg Opinion columnist Nisha Gopalan.
• More on London’s plans to lure Chinese firms and controls on share swaps.
• The Chinese regulator’s consultation paper.
• QuickTakes on China’s MSCI inclusion and the bond link.

To contact Bloomberg News staff for this story: Benjamin Robertson in Hong Kong at brobertson29@bloomberg.net;Lucille Liu in Hong Kong at xliu621@bloomberg.net

To contact the editors responsible for this story: Sam Mamudi at smamudi@bloomberg.net, Grant Clark, Jeanette Rodrigues

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With assistance from Bloomberg