A man walks past a digital screen at the London Stock Exchange (XINHUA)
On August 31, the China Securities Regulatory Commission (CSRC) issued rules for the stock connect scheme between bourses in Shanghai and London and solicited public opinion on the matter. The plan is expected to be rolled out by the end of the year, encouraging listed companies in the two cities to apply for floatation on each other's exchanges.
Investors and industry observers will likely associate the Shanghai-London Stock Connect with the Shanghai-Hong Kong Stock Connect, which had a positive influence on the A-share market by creating a stock price rebound, and later a bull market following its approval in April 2014.
Could, then, the launch of the new stock connect scheme have such an effect? This is unlikely because, back then, the Shanghai-Hong Kong Stock Connect was able to light the bull market fuse only due to seven years of prior adjustment, policy support and meticulous care from the management level.
Although both stock connect schemes are important for the opening up of A-share companies, they differ in that the Shanghai-Hong Kong connect marks the flow of investors between markets in the two cities, while the Shanghai-London connect focuses on the flow of investment targets—listed companies.
The Shanghai-London connect allows eligible companies in the two cities to issue depository receipts and trade in each other's markets in line with each other's laws and regulations. Instead of introducing an increasing number of investors to the A-share market, the Shanghai-London connect will bring in more investment targets. Therefore, without changing the existing investor structure of the A-share market and introducing new capital, the Shanghai-London connect will not become the catalyst for a bull market.
Although the impact of the new stock connect scheme on the A-share market will not be as direct as that of the Shanghai-Hong Kong connect, its influence is nonetheless significant and should be taken into account by investors.
Firstly, the Shanghai-London Stock Connect will provide new investment targets and options. The rules say that there are two directions of business—eastward and westward. Eastward business refers to London-listed companies issuing China Depository Receipts (CDR) on the Shanghai bourse, while westward business pertains to Shanghai-listed companies issuing Global Depository Receipts (GDR) on London's boards. The move suggests that cross-border companies listed in London will float on the Shanghai bourse in the form of CDR, among which some prominent companies will become quality investment targets in the A-share market. The dream to add an International Board to the Shanghai stock market could be realized with the launch of the Shanghai-London Stock Connect.
Moreover, the new stock connect scheme between Shanghai and London will become a touchstone for Shanghai-listed companies. The westward business allows A-share listed companies on the Shanghai bourse to issue GDR on the London board, a way to float in London in the form of GDR, which is a boon for Shanghai-listed companies as they gain a new platform for raising capital. With the stricter and more normative supervision of the London bourse, the Shanghai-London Stock Connect is both a challenge and touchstone for Shanghai-listed companies.
In addition, the Shanghai-London Stock Connect will boost the structural optimization of the A-share market. Leading enterprises and blue chip companies who are likely to issue GDR on the London bourse will be more sought-after investment targets as these companies have a clear development target. Similarly, those overseas companies floating on the A-share market in the form of CDR will primarily be high-quality companies and popular targets of pursuit.
This is an edited excerpt of an article written by economic commentator Pi Haizhou and published in International Financial News
Copyedited by Laurence Coulton
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