Shanghai-London Stock Connect extends China’s integration with global market

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FOLLOWING the positive outcomes of President Xi Jinping’s state visit to UK in October 2015 and the China-UK Economic and Financial Dialogue, authorities from the two countries have agreed through consultations to establish a market connect scheme between the Shanghai Stock Exchange (SSE) and the London Stock Exchange (LSE). It allows listed companies from both countries to cross-list depository receipts (DRs), a program referred to as the Shanghai-London Stock Connect.

A stock connect is a unique collaboration between stock exchanges in the respective countries to allow investors to trade securities in each other’s markets through the trading and clearing facilities of the investors’ home exchange. Hence, Shanghai-London Stock Connect removes restrictions for UK’s investors into China and vice-versa.

In order to facilitate business activities under the Shanghai-London Stock Connect, the China Securities Regulatory Commission (CSRC) has drafted the “Provisions on the Supervision and Administration of Depository Receipts under the Stock Connect Scheme” and it is up for trial.

The provisions stipulate normative requirements for market entities as well as their activities under the Shanghai-London Stock Connect, committed to the principles of protecting the legitimate interests and rights of investors, maintaining market order, and containing financial risks.

The Provisions contain 30 articles which include such aspects as DR issuance, listing, trading, information disclosure, and cross-border conversion.

The provisions include details of application documents, review and approval procedures, and sponsors, due diligence, accounting and auditing requirements, and amount cap on China DRs in proposed issuance.

For cross-border conversion mechanism for China DRs specifics on the two types of cross-border conversion, namely creation and redemption, eligibility criteria and registration requirements, Chinese Mainland securities companies will engage and put forward a code of conduct for cross-border conversion institutions regarding assets custody and overseas investments.

Principles with respect to regulatory and supervisory requirements for CDRs are also provided. Framework for regulations are being established and put in place regarding terms on Great Britain DR issuance conditions, offering price, lockup period for redemption, as well as requirements on foreign securities companies and depositary banks.

Enforcement activities that specify the legal responsibilities of all relevant market participants have also been established.

The Shanghai-London Stock Connect is a milestone between both countries to further the two-way opening of Chinese capital markets in response to the directives of the 19th National Congress of the Communist Party of China (CPC).

The idea of Stock Connect is not new, as the Shanghai-Hong Kong Stock Connect was established in 2014 and after two years, the Shenzhen-Hong Kong Stock Connect was launched. It was symbolic for China and Hong Kong because it signifies that there is an increasing awareness, demand and opportunities for securities in both countries.

The trading turnover northbound into China via Hong Kong has increased since its launch. Last month alone buy and sell trades in total into Shanghai and Shenzhen Stock Exchanges was RMB 460 billion.

Shanghai-London Stock Connect is a significant move and sets the pace for similar stock connects with other markets in the future. In addition to recent bold moves in easing foreign ownership of China’s mutual fund companies are futures trading firms, securities brokers and banks the Chinese financial industry will swiftly and rapidly integrate into the global financial system.