The Shanghai-London Stock Connect (SLSC) will allow companies listed on the London Stock Exchange (LSE) to sell global depositary receipts (GDRs) to mainland Chinese investors, and permit mainland Chinese firms to offer foreign investors opportunities to invest in Chinese companies listed on the LSE via Chinese Depositary Receipts (CDRs). It is the first time that foreign investors will be allowed to invest in Chinese A-shares via ADRs. Also, the Chinese government will allow Chinese investors to swap their GDRs for corporate equity if certain conditions are met. Planning The UK and Chinese governments have been planning the implementation of the…
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The Shanghai-London Stock Connect (SLSC) will allow companies listed on the London Stock Exchange (LSE) to sell global depositary receipts (GDRs) to mainland Chinese investors, and permit mainland Chinese firms to offer foreign investors opportunities to invest in Chinese companies listed on the LSE via Chinese Depositary Receipts (CDRs). It is the first time that foreign investors will be allowed to invest in Chinese A-shares via ADRs. Also, the Chinese government will allow Chinese investors to swap their GDRs for corporate equity if certain conditions are met.
The UK and Chinese governments have been planning the implementation of the SLSC since 2015. It was scheduled to be launched in 2018.
During the design and implementation phase, the English and Chinese resolved differences in currency, stock market operation hours, and management of the stock exchange transactions.
Investors outside of China will be able to invest in China via Global Depositary Receipts (GDRs). Mainland Chinese investors will be able to invest in foreign companies via Chinese Depositary Receipts (CDRs).
There are even efforts being made to reduce the amount of time stocks must be held by Chinese investors before their GDRs can be exchanged for equity in the companies sponsoring the GDRs.
The Biggest Winners
Mainland Chinese Investors
The Chinese and UK governments have predicted that a “marriage” between the LSE and the Shanghai Stock Exchange (SSE) will better unite the markets in the East and West. It may even result in a trading volume on the LSE rivaling those seen on mainland exchanges.
The LSE is the fourth-largest stock exchange in the world, with a market cap of US$2.9 trillion, and it hosts companies from all over the world. The new link thus grants mainland Chinese investors excellent access to investments from all over the world. In addition, Chinese investors will have the opportunity to learn how international markets work, how the listed equity prices change, and how to evaluate foreign equities.
The Shanghai Stock Exchange (SSE), the world’s sixth-largest stock exchange, has a market cap of US$2.7 trillion. While investors have been able to trade some companies listed on the SSE through the Hong Kong and New York stock exchanges, that access has been quite limited. But for the SLSC, the Chinese government has loosened its capital controls, made plans to allow mainland Chinese investors to swap their GDRs for shares in the sponsoring companies, and made it easier for them to access information on the companies issuing GDRs in China.
Mainland Chinese Companies
Some Chinese corporate titans are excited about being listed on the LSE because they want more international exposure and investors. They see the influx of foreign capital as a way for them to expand their operations, acquire more market share, and decrease their dependence on the Chinese government and mainland Chinese investors. There is no way to know if these companies will benefit as predicted. But the chance that it’s true means that this opportunity is too good to ignore and discount.
Companies Listed on the LSE
Some foreign companies listed on the LSE are eagerly anticipating a large influx of capital from Chinese investors. However, there are some strings attached to the GDR investments. China is not willing to loosen its capital controls too much. The Chinese government is concerned that some companies and high-net-worth individuals will use it as a way to shift capital away from China. Another concern is that investors will use their equities on the LSE to exchange yuan-based investments for investments in other currencies.
Questionable Benefits for London Investors
Many of the Chinese stocks that will be made available on the LSE are already available to London investors on the Hong Kong stock exchange (H shares) or in the US (ADRs). So, the SLSC does not seem to offer a significant new opportunity to London investors. For those who want to invest directly in A shares, they can simply buy them in Hong Kong Stock Exchange via Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect.
UK Fund Managers
The only group of investors that may benefit from the SLSC is UK fund managers. They are only allowed to purchase stocks listed on the LSE. So, as the Chinese equities receive more favorable ratings and standing on the MSCI Inc. and the FTSE Russell, it is likely that UK fund managers will show more interest in them. The greater interest could translate into greater demand for Chinese equities on the LSE.
The SLSC has a lot of potentials to facilitate the infusion of capital into companies listed on the LSE and SSE. In addition, it will allow Chinese and foreign investors more access to each other’s listed stocks and with fewer limitations than before.
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Disclosure: Alisa Hopkins doesn't own any of the stocks mentioned. Motley Fool Hong Kong is not licensed by the Hong Kong Securities and Futures Commission to carry out any regulated activities under the Securities and Futures Ordinance.