Shanghai-London Stock Connect – a new structural connection between Shanghai and London

At a Glance…

London Stock Exchange Group Plc (LSE) has announced that shares can now be admitted to the Shanghai-London Stock Connect (Stock Connect). Stock Connect brings together one of the world’s largest domestic capital markets (Shanghai) with the world’s leading international market (London) and opens up the opportunity for global investors to trade shares in Chinese companies and for Chinese investors to buy shares in London-listed companies.

The LSE has described the new market as a “milestone” in bringing the capital markets of London and Shanghai together. Stock Connect allows eligible companies listed in each market to issue, on the other exchange, a depositary receipt (DR) that can be traded under local rules in the local time zone. It also represents the first time the Shanghai Stock Exchange will be open to foreign issuers and the first time that a DR will be capable of being converted into an ‘A’ share which is fully fungible.

The LSEs announcement is available here.

Authors: Delphine Currie, Denise Jong and Johnathan Webber

Scope

• Stock Connect is only open to blue-chip companies in each market with a market cap of approximately £2.2 billion.

• All participating companies will be required to meet the listing and ongoing obligations specific to each market.

• Chinese companies listing in London will be admitted to the Official List regulated by the Financial Conduct Authority.

• LSE-listed companies seeking to list in Shanghai will be approved by the China Securities Regulatory Commission.

Listing Chinese depositary receipts on Stock Connect

• London-listed companies looking to raise capital from Chinese investors will be able to list Chinese DRs on the Shanghai Stock Exchange Main Board and these will be treated like domestic ‘A’ shares and have an underlying share listed in London.

• To be eligible, issuers must have been listed on the LSE for at least three years and have been premium-listed for at least one year.

• At the outset, DRs listed on the Shanghai Main Market will be non-capital raising although the intention is for that to change in the medium to long term.

• Chinese DRs will need to meet a 25 per cent free float requirement.

Listing global depositary receipts on Stock Connect

• Shanghai-listed companies will be able to list global DRs in London, on a newly created Shanghai Segment of the International Order Book, while creating an equivalent ‘A’ share to be listed in Shanghai.

• To be eligible, issuers must be listed on the Shanghai Stock Exchange.

• Global DRs will need to meet a 25 per cent free float requirement.

Trading DRs

• Investors will be able to buy and sell DRs using existing trading channels and practices.

• Cross-border trading will be executed by Stock Connect-designated brokers from both markets, who will be able to access the underlying securities and meet the demand for DRs.

Stock Connect in practice

The first company from either Shanghai or London to list on the Stock Connect was Chinese broker Huatai Securities Co Ltd, which successfully raised US$1.54 through the issue of DRs.