China’s securities regulator on Friday published draft rules for the long-awaited cross-border stock connect scheme between Shanghai and London, and encouraged firms listed in the two cities to apply for floatation on each other’s exchanges. This marks another major leap-forward in the progress of opening after the country launched the stock connects scheme linking Shanghai and Hong Kong, Shenzhen and Hong Kong.
China launches regulations for Shanghai-London stock connect
On August 31, the China Securities Regulatory Commission announced that it would solicit opinions on the regulations for Shanghai-London stock connect scheme.
Shanghai-London stock connect is an interconnection scheme between Shanghai and London which allows eligible investors in the Shanghai Stock Exchange and the London Stock Exchange to trade stocks in the form of depository receipts (DRs). Chinese companies can raise fresh money through issuing Global Depository Receipts in London. However, London-listed firms can initially only issue China Depository Receipts backed by existing shares, meaning they cannot raise funds through Shanghai listings.
The scheme would allow Chinese investors to invest in quality overseas-listed companies, while giving domestic firms support in expanding their global businesses.
Multi-regional cross-market portfolio investment platform forms
China Securities believes that those stocks first that are allowed to be traded in Shanghai-London stock connect are likely to be included in the FTSE 100 index. These companies are mainly concentrated in industries such as oil, banking and natural gas. CITIC Securities also believes that whether it is in Shanghai or London, listed companies are mainly concentrated in the traditional economy such as finance, energy, industry, consumption.
It is widely believed that the launch of Shanghai-London Stock Connect will expand two-way opening up of China’s capital market. SSE indicated that the stock connect program is of great significance in many aspect. It will help expand two-way opening up of China’s capital market, improve the depth and internationalization of domestic market, boost domestic securities institutions to conduct cross-border securities business, and improve international competitiveness of securities industry. At the same time, the mechanism provides chance for issuers and investors of Shanghai and London to have investment and financing in each other’s markets, allows domestic investors to invest in overseas products in local market, supports listed companies in A-share market to get funds from overseas market, and bolsters the real economy to carry out cross-border financing and mergers and acquisitions.
Guotai Junan Securities viewed that the stock connect facilitates the listed companies in Shanghai and London which meet certain conditions to go listing and trade depository receipts in each other’s markets. Rolling out the stock connect mainly aims to drive the process of internationalization of China’s capital market, enhance its international influence, allow domestic investors to invest in overseas products in local market, support listed companies in A-share market to get funds from overseas market, and bolster the real economy to carry out cross-border financing and mergers and acquisitions.
Launching the program is quite natural under the background with further opening up of China’s financial industry and capital market, said Dong Dengxin, dean of Financial Securities Research Institute at Wuhan University of Science & Technology. Chinese enterprises, which are fast growing now, have demand for financing, while enterprises from matured market hope Chinese investors to invest join in corporate investment. Therefore, the Shanghai-London Stock Connect is a win-win mechanism. Dong thought the LSE represents Europe market. There’s also the stock connects bridging Shanghai or Shenzhen with Hong Kong. This means that Chinese investors already own an investment platform involving multi places and markets, while cycles of these markets are completely different, which is more beneficial to portfolio investment and smooth risks. It offers another channel for international capitals to invest in A shares. European capitals are able to directly invest in A shares in London. In addition, high-quality enterprises listed in the LSE can be directly listed in SSE via Shanghai-London Stock Connect, which is also an innovation.
Two-way opening up of China’s capital market will be deepened
Boosting the opening up of China’s capital market has become of the important task of China’s regulators in 2018. The CSRC will push forward the implementation of policy of relaxing restrictions on foreign investment in domestic securities industry. It will accelerate various preparatory work and strive to roll out the program within this year. It supports A shares to be included in FTSE Russell international index and increase weight of A shares in MSCI index. It will revise rules of QFII and RQFII systems, relax conditions on market access and broaden investment coverage for overseas capitals.
In fact, various indexes from MSCI to FTSE Russell international index keep increasingly paying attention to China market lately. The weight of A shares in MSCI emerging market index rose to 0.75 percent, effective from closing hour of August 31.
Meanwhile, the A shares are expected to be included in FTSE Russell international index. Recently, the index provider FTSE Russell’s CEO said that if the company decided to include A shares into its flagship index in September, the FTSE Russell international index will provide higher weight to A shares than its competitor MSCI. As of March of this year, the index system covered about 16,000 stocks from 47 different countries, and the core indexes related with China are FTSE Russell global index and FTSE Russell emerging market index. According to estimation of securities companies, the FTSE Russell international index will theoretically bring 500 billion US dollars, or over 3 trillion yuan, of incremental capitals to A shares, based on about 1.5 trillion US dollars of market size of FTSE Russell international index.
Source: CNSTOCK,Translated by Coral Zhong and Vanessa Chen
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