The Shanghai-London Stock Connect was launched in June 2019 to link the London and Shanghai Stock Exchanges, but until recently, the initiative hasn’t generated much excitement.
And, as US efforts seeking to restrict or discourage Chinese companies from listing on New York stock exchanges (NYSE and Nasdaq) intensify, Chinese companies are increasingly looking to Hong Kong and London as alternative venues. As a result, the Shanghai-London Stock Connect could finally have its moment as a conduit to facilitate cross-exchange trading for Chinese companies seeking greater European exposure and investors.
The London Stock Exchange (LSE), founded in 1571, is the world's oldest stock exchange and remains the largest European stock exchange for initial public offerings (IPOs) by proceeds raised. The LSE has substantial liquidity and trading volumes of equities, debt securities, and funds, and is a popular listing venue for emerging markets companies, especially natural resources, infrastructure and industrial companies. As New York has lost its allure, London has become more attractive to Chinese companies seeking greater liquidity.
As compared with a New York stock exchange listing, LSE listings generally are subject to less regulation, have a lower liability profile (as investor lawsuits are less prevalent in London), and are more flexible with respect to disclosure, accounting standards, and governance requirements.
They also offer additional prospects for research and development opportunities at European universities and access to potential European government funding that might not otherwise be accessible to Chinese companies.
Additionally, LSE-listed shares provide valuable acquisition currency for Chinese companies seeking European M&A opportunities, and issuing European listed debt securities is a common mechanism for funding acquisitions.
Chinese companies have not historically pursued LSE listings, in part, due to the domestic complications and political issues involved in seeking a secondary listing outside of China. For those companies seeking an international listing, New York has been the preferred venue.
In an effort to promote London as an alternative listing venue to New York for Chinese companies, Chinese President Xi Jinping’s introduced the Shanghai-London Stock Connect during his 2015 trip to the UK, although it was not well received when it was first launched in June 2019.
Until China Pacific Insurance's June 2020 issue, and LSE listing of US$1.8 billion in GDRs (global depositary receipts, representing the company's underlying Chinese A shares), which remains the largest new share listing on the LSE this year, only one other Chinese company had completed a cross-exchange listing in London. Several other Chinese companies have received approval or announced an intention to seek approval.
Currently, there are only six Chinese companies listed on the main market of the LSE (dozens of offshore holding vehicles for Chinese companies are listed, as well).
The China Securities Regulatory Commission (CSRC) is believed to be vetting applications by several Chinese companies looking to list GDRs in London via the Shanghai-London Stock Connect.
In addition to having to obtain approval from the CSRC, Shanghai Stock Exchange-listed companies must be approved by the UK Financial Conduct Authority (FCA) and meet the criteria for LSE admission, which requires a minimum market capitalization of 20 billion yuan (US$2.9 billion), a 25% free float, and a published FCA-approved prospectus.
Chinese companies seeking a London listing generally need sufficient liquidity and trading infrastructure to support a London listing and must generate sufficient market interest amongst investors. For Chinese companies that are less recognized outside China, having a London-based investor relations manager or company, as well as holding regular investor meetings in London, helps to support and reap the benefits of a London listing.
Among the benefits to Chinese companies are the ability to raise funds in US dollars, euros or pounds sterling and raise their profile among European investors, business partners and customers.
For secondary market trading, investors in cross-exchange listed Chinese companies can deposit or withdraw Chinese A shares into the GDR facility to trade on both exchanges. Chinese listed GDRs trade during London business hours on the LSE's Shanghai segment and settle through Euroclear, easing the process for European investors.
Hong Kong still remains a popular alternative to London and New York, especially for technology companies, which account for a significant percentage of Chinese listed companies.
With the ability of Hong Kong trading firms to become LSE members, European investors can also easily access China's stock markets through these firms and their membership on the Hong Kong Stock Exchange (HKSE).
The Hong Kong Stock Connect is a trading link between the HKSE and the Shanghai and Shenzhen Stock Exchanges, which allows investors on the HKSE to purchase Chinese A shares directly, as opposed to acquiring GDRs through the LSE.
Although GDRs are essentially the same instrument as the underlying shares, GDRs tend to trade at a discount to the underlying shares. Further, London investors in Chinese GDRs generally must wait 120 days following a London IPO to convert their GDRs into the underlying Chinese A shares.
The renewed focus on the Shanghai-London Stock Connect should stimulate interest in the LSE and, for Shanghai-listed companies seeking greater international exposure and liquidity, could be a lucrative step into the international market.
Nell Scott is a partner in the London office of Orrick, Herrington & Sutcliffe.