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Connection Issues -“ Hopes fade for Shanghai-London Stock Connect scheme

The Shanghai-London Stock Connect scheme got off to a flying start with 4 transactions and over USD 5.8bn of volume over 2019 and 2020, but there are fears that there is little more to come in the future in London, although there is hope for Chinese listings on other exchanges.

The scheme is a strategic initiative between the Shanghai and London Stock Exchanges, launched in 2019 and was hailed as a ground-breaking initiative to boost cross-border investment between the two countries and improve access to each other’s capital markets.

Four Chinese companies ended up listing global depository receipts on the LSE between 2019 and 2020: Huatai Securities (HTSC), China Pacific Insurance, (CPIC), China Yangtze Power (CYPC), and SDIC Power Holdings Co (SDIC).

However, while several Chinese companies found new opportunities to raise money in London, there has been no reciprocal issuance by UK firms in China, causing some to question the scheme and its viability.

Although the scheme has allowed Chinese companies to raise large amounts of money in London, an ECM banker said more had been expected over the four years the scheme has been active and that the overall impact has been limited.

An ECM lawyer said listing in London was a good move for Chinese companies that took the opportunity, and the scheme was a solid branding vehicle to boost international attention for the LSE. But the same lawyer acknowledged the scheme had unfortunately lost momentum.

He added that the London-listed GDRs for companies who have taken advantage of the scheme have often traded at a discount to the underling shares listed in Shanghai, which had reduced the overall attractiveness of the scheme for potential issuers and investors, who would rather buy the direct underlying shares in Shanghai if they can.

Swiss ambitions

However, momentum has not completely stalled.

Early this year, China proposed to expand the Shanghai-London Stock Connect program to include companies listed on the Shenzhen Stock Exchange, as well as Swiss and German stock exchanges, according to public information.

Two advisers said that around six Chinese companies are looking to engage with the Swiss SIX Exchange, attracted by the strong economy and investment scene and the stability of its currency and politics.

In March, heavy equipment manufacturer Sany Heavy Industry [SHA: 600031], pharma company Lepu Medical Technology [SHE: 300003] and battery producer Gotion High-Tech [SHE: 002074] all filed documentation with local exchanges about their intention to issue GDRs in Switzerland, according to previous reports.

The same adviser said that companies are attracted to these sorts of listings as regulations are strict in China on doing secondary listings, making a follow-on on the GDR segment of the SIX exchange a far less arduous deal.

But the Chinese Government is likely to expect a much more vigorous engagement from Swiss companies than they have had with UK firms, the adviser said.

“They wanted to boost the profile of Shanghai with secondary listings from big Western recognisable names. In that sense they did not get that with London,” he said.

Hope for more Chinese listings in Europe is not dead yet.