Following the success of the Shanghai-Hong Kong and Shenzhen-Hong Kong stock connects, China’s regulators are keen to roll out the link to London, in what is the latest example of China’s renminbi internationalisation strategy.
But the initial blueprint of the rules, published and under public consultation since the start of September that will govern the London-Shanghai Connect, has raised more questions than provided answers.
“The [China Securities Regulatory Commission] and the [London Stock Exchange] are both consulting on the London-Shanghai Connect but the consultations currently lack the necessary details,” Eugenie Shen, head of the asset management group at Asia Securities Industry & Financial Markets Association (Asifma), told GlobalMarkets. “Besides doing public consultations, they need to work closely with the buy and sell side of the industry to iron out the operational issues of the Connect.”
Among the missing details that need sorting out are issues around fungibility, currency conversion, settlement and clearing, and other operational issues, said Shen. She pointed to the example of Chinese stocks’ settlement period of T+0 days, while the LSE settles on a T+2 cycle. Differences such as these will need to be worked out, as was done with the Shanghai and Shenzhen connects with Hong Kong, she added.
In its basic form, LSE listings by Chinese companies will be done through Global Depository Receipts (GDRs), which will be the same as the traditional GDRs except they will trade on a special section of the exchange, called the Shanghai Board. Foreign listings on the SSE will be through Chinese Depository Receipts (CDRs).
A big difference between China’s link with London versus the Hong Kong tie-ups is the usage of depositary receipts for the former, while the latter involves shares. This change means more clarity is needed around the relationship between the depositary receipts and the underlying stocks themselves and how fungible they are, say market watchers.
And then there is the question around what currencies will be used for trading GDRs. The draft rules throw little light on that, with speculation rife about dollars, pounds or renminbi being in favour. But the dollar appears to have a natural advantage.