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China and UK eye trading link for stock exchanges

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China and the UK are set to usher in a “golden decade” in their bilateral relations, with the two countries proposing a stock trading link as a key part of the policy. Many have denounced the idea as a bridge too far, but if it goes ahead, the move could be a great leap forward for China’s international ambitions, writes John Loh.

UK Chancellor George Osborne revealed this week during a speech at the Shanghai Stock Exchange that a feasibility study would be conducted to pave the way for Chinese and British shares to be traded in both countries. He was on a visit to China to boost commercial and political ties.

In his speech, Osborne referenced the close ties China and the UK had enjoyed over the years, which he said has led to the UK becoming the top western centre for renminbi business. The UK was the first G7 country to agree on a currency swap line with China, and also the first foreign country to issue sovereign debt in renminbi.

But it was his suggestion for mutual market access between the two countries’ stock markets that drew the most attention. “I want to see our stock markets in London and Shanghai formally connected, with UK firms raising funds from Chinese savers, and Chinese firms listing in London,” Osborne said.

The reaction from market participants so far has been a mix of incredulity and indifference. In London, the response among bankers was muted. “Not immediately relevant” and “probably not important” was the gut reaction from one head of ECM in the city.

Market watchers in Asia though are drawing parallels between the proposal of a China-UK Through Train and the Shanghai-Hong Kong Stock Connect, which launched in November last year to much fanfare, creating a landmark pathway for international investors to buy onshore China stock for the first time in history.

But Osborne’s plans take things to another level by allowing foreign firms, in this case UK companies, to raise capital from Chinese investors. This is not possible even under the Shanghai-Hong Kong Stock Connect, whose scope so far only extends to stock trading.

Previous attempts

The proposed China-UK link mirrors previous attempts by the former to open itself up. In February, Deutsche Börse was looking to wrap up a wide-ranging co-operation agreement with the Shanghai Stock Exchange, which would have opened the German and European financial markets to Chinese investors.

The tie-up is supposed to launch in the fourth quarter of this year, according to market participants, but it appears to have been put on ice after China’s stock market suffered its worst rout in years, wiping out trillions in market value since mid-June.

That wasn’t all. Back in 2011, media reports in China suggested that the Shanghai Stock Exchange, after four years of preparation, was close to setting up an international board to be used as a platform for foreign firms seeking to list in China.

A number of well known multinational firms were said to have expressed interest in listing on the international board, including HSBC and Unilever. But the proposal went nowhere and has now fizzled out. HSBC and Unilever did not reply to requests for comment by press time.

An economist who focuses on China questioned how a China-UK trading link could take off when usage of the Shanghai-Hong Kong Stock Connect remains below expectation. “They have built the bridge but they can’t force people to walk on it,” he said. “Right now [Stock Connect] is more symbolic than anything.”

But Benjamin Kroymann, a Shanghai and Berlin-based partner at law firm Squire Patton Boggs, thinks these are early days.

“If a trading link between the UK and China works out as planned it could have more far-reaching consequences than even the Shanghai-Hong Kong Stock Connect,” he reckoned.

Great leap forward

Allowing UK companies to raise capital in Shanghai would be a considerable step forward, as foreign firms are barred from listing in China, he said. It would also help China normalise volatility on its stock exchanges and integrate them into global financial markets, reducing the risk of another collapse.

But how mutual market access between China and the UK will look in practice is very much up in the air, especially on matters like jurisdiction and whether foreign investors will have the same rights as domestic investors, say market watchers.

At least one market participant believes there will be demand for a China-UK trading link, going by the amount of interest foreign firms had showed at listing on the international board in the past, though it only permitted secondary listings. This is because it would increase their profile with domestic Chinese investors, he added.

Creating a capital raising channel between China and the UK could also mean Chinese companies can list in London without resorting to complicated offshore structures, which are time and cost consuming, said Kroymann.

While it is not known if the kind of access envisioned by both countries will eventually lead to primary as well as secondary listings on their stock exchanges, the appeal is obvious. If companies are granted access to tap Chinese money, even non-UK firms may jump on the bandwagon, said market watchers.

Meanwhile, the benefits of the plan to China are plain to see. “China will be keen to help local investors diversify their risk away from real estate and A-shares, because a crash in either sector could have disastrous consequences,” said one source. 

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