London-Shanghai Market Connect Goes Live Monday
Investors in the United Kingdom will now be able to invest in firms by listed on the Shanghai exchange, and vice versa, as a market connect linking the two markets launched Monday.
The London-Shanghai market connect allows firms in the two countries to cross-list their shares via the respective exchanges, bringing access to international capital. This will be done via Global Depository Receipts, or GDRs, and not direct shares. GDRs are a bank certificate that represents shares in a foreign company, held by a local branch of a foreign bank. Effectively this means that an investor can ‘buy local’, saving the trouble of opening a foreign brokerage account and exchanging currency but get exposure to the growth of a foreign market.
There are some nuances to the rules: While Shanghai-listed companies can raise new funds with new shares via London’s stock market, British companies can only sell existing -- not new -- shares in Shanghai.
This makes the London connect different from prior market links China established with Hong Kong, which allow investors to trade shares through local brokerages.
Why Does the UK Want a London-Shanghai Market Connect?
Uncertainty about Brexit is still at an all-time high in the UK. In late May, Prime Minister Theresa May announced she was stepping down given her inability to negotiate the terms of a Brexit deal with the European Union or even approve such a deal for negotiation with stakeholders in the UK.
After recovering from the 2008 recession, year-over-year economic growth in the UK has been modest.
Uncertainty over Brexit doesn’t help, as growth is forecast to remain tepid up until 2021, at a 1.2% year-over-year growth rate.
All the while the UK has been trying to woo new trade partners. China has been a big target for a new trade channel throughout the last decade. China is currently the UK's fifth largest trading partner and the second largest non-EU partner after the United States. Exposure to this market via the London - Shanghai market connect would give another domestic investment opportunity to local fund managers, who might not be allowed to purchase foreign stocks. This will help shield their clients’ portfolios from a UK economy that is expected to be something of a laggard for the next few years.
Why Does China Want a London-Shanghai Market Connect?
China’s rationale for pushing the stock link is a bit more complex. China has strict capital controls that discourage its citizens from moving cash outside its borders. Beijing believes that if left without restriction an uncomfortable amount of capital would depart China which would make supporting the RMB’s peg with major currencies difficult.
This provides the best of both worlds solution: Chinese investors can buy foreign stocks, but the funds remain in RMB and not converted into a foreign currency when the stock is sold. Capital inflow without the outflow: Investors will be able to exchange London-listed depositary receipts for company stock denominated in RMB in Shanghai, but not the other way around (as that would allow Chinese shares to be sold for British Pounds).
The other elephant in the room is the trade war. Beijing is keen to open up more investment doors around the world as there’s no end to the trade war in sight. The UK is one of the world’s largest economies, so this partnership makes sense.
Which Companies Are Interested in a London-Shanghai Market Connect?
So far China’s Huatai Securities is the only company that has committed to listing on this market connect. The company’s GDR’s in London were up nearly 7% when the market opened on Monday.
The rumour mill has it that many traditional blue-chip stocks in the UK are considering a listing, but no formal commitments have been made.