UK, Chinese Regulators Bless London-Shanghai Stock Market Pact

Tom Burroughes

18 June 2019

British and Chinese financial regulators have announced their approval of a stock exchange link between the UK's and Asian giant's bourses, a move that in some ways pushes against a trend of rising protectionism affecting China in recent months.

The jointly gave their blessing to the Shanghai and London Stock Exchanges’ proposed new Shanghai-London Stock Connect. They also published a memorandum of understanding (MoU) aimed at providing the basis for the regulatory co-operation that will support the success of the scheme, a statement from the organisations said.

The linkup was launched at a ceremony yesterday at the London Stock Exchange. The connection is described by the FCA as a "reciprocal arrangement" between the exchanges. The regulators' memorandum of understanding also underpins the pact.

While the US has hit Mainland China with tariffs in recent months - prompting a tariff response - the move also shows that the Asian country is keen to open up its capital markets to inward investment, tapping centres of liquidity such as London. The mainland's stock markets are already hooked up to the Hong Kong stock market via "connect" links.

"The Shanghai-London Stock Connect will enable Shanghai-listed Chinese companies to apply to be admitted to trading on a newly-formed Shanghai Segment of London Stock Exchange’s Main Market, while companies with a premium listing in the UK will be able to apply for admission to the Main Board of the SSE," the FCA said.

In both cases, the securities traded will be in the form of depository receipts. This investment structure enables overseas companies to access institutional investors in global financial centres such as London. However, the structure is new to China, the FCA said.

The Shanghai-London Stock Connect will be one of a suite of Stock Connect schemes entered into by the People’s Republic of China. The original scheme was the Shanghai-Hong Kong Stock Connect scheme, launched in 2014. In contrast to the Hong Kong scheme, which enabled Mainland Chinese resident investors to trade Hong Kong listed securities and vice versa, the Shanghai-London scheme will be based around encouraging cross-listings on the two venues via the issue of depository receipts. This means that only the securities of those companies that apply to join the scheme and which then issue depository receipts under the scheme can be traded under the Shanghai-London Stock Connect programme.