While there has been much focus on the Hong Kong-Shanghai Stock Connect program, there is a similar arrangement between Shanghai and London. In a move which went live in 2019, there is now a solid relationship between the London stock market and its Chinese counterparts. Consequently, trade execution in major Chinese companies and, just as importantly, clearing services have never been easier. So how does the Shanghai-London Stock Connect system work?
The key benefits
Whether a short-term trader or long-term investor, access to the Chinese market brings about a range of potential investments. This market has grown significantly over the years and is a leading light in the Far East, yet has until now been relatively inaccessible for foreign investors. The impact has been very positive, whether looking specifically at trade execution or clearing services.
When announced, the Shanghai-London Stock Connect tackled some unique challenges:-
• Offering mainland China listed companies the chance to raise capital via foreign markets
• The first time that Chinese investors were able to acquire overseas shares without domestic capital controls
• A rare opportunity for investors to acquire China A-shares from outside the country, using international trade execution systems and clearing services
As London is one of the busiest stock markets in the world, this has opened up Chinese listed companies to the international investment world. Obviously, higher trading volumes have improved liquidity and offered an opportunity to raise capital outside China.
How does Shanghai-London Stock Connect trade execution work?
Similarly to American Depository Receipts (ADRs), which allow US companies to trade on the London stock exchange, we now have Global Depository Receipts (GDRs). GDRs are tradable blocks of shares, in this instance in individual Chinese companies, which are listed on the London stock exchange and go through the traditional clearing services.
Investors buy and sell GDRs as you would any other share, creating exposure to the underlying company. As a listed entity on the London stock exchange, this also secures access to the comprehensive service platform and an enhanced relationship with international institutional investors. A win-win scenario for Chinese companies!
It is important to remember that this works two ways, allowing Chinese investors to acquire London-listed companies within their local investment trade execution and clearing services framework.
Which Chinese companies use the Connect trading system?
Remembering that this is still relatively early days, and the minimum market capitalisation for a GDR listing in London is $2.9 billion, the list of companies at the moment is relatively small. It currently takes in:-
Huatai Securities Co.
Huatai Securities is a Chinese listed securities firm with a market cap of just over £12 billion and was one of the first to join Connect.
China Pacific Insurance (Group) Co.
Again, one of the initial members of the London-Shanghai Connect system, China Pacific Insurance has a market cap of more than £16 billion.
China Yangtze Power Co.
China Yangtze Power is a massive company with a market capitalisation of £62 billion. The group has welcomed the ability to access international funding.
SDIC Power Holdings Co.
Yet another sizeable Chinese power company, SDIC Power Holdings, joined a little later in October 2020 and boasts a market cap approaching £10 billion.
Trade execution improves with increased liquidity
Trade execution and clearing services are critical when international investors are looking overseas. The fact that GDRs offer the ability to use local clearing services and tradeexecution facilities gives investors the best of both worlds. Until the emergence of Connect, it was tough, if not impossible, to gain any meaningful exposure to major Chinese companies.
Short-term trade execution was relatively non-existent, international clearing services were not recognised, and many people gave up on adding Chinese exposure to their portfolio. However, the system has changed since 2019, and while the list of Chinese companies currently making use of the GDR trading facilities is relatively low, this will increase significantly in due course.