In June 2019, the China Securities Regulatory Commission and the Financial Conduct Authority of the United Kingdom announced the establishment of the Shanghai-London Stock Connect. This is a mechanism that connects the Shanghai Stock Exchange and the London Stock Exchange by allowing eligible companies listed on either of the two stock exchanges to issue, list, and trade depository receipts on the counterpart's stock market in accordance with applicable laws and regulations.
In this article, we explain the mechanism behind the Shanghai-London Stock Connect, and compare it with the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect (see here).
Mechanism
Eligible companies listed on the Shanghai Stock Exchange can issue global depository receipts (GDRs) and apply for a listing of their GDRs on the Main Market of the London Stock Exchange.
Note: global depositorary receipts are a type of bank certificate that represent shares in a foreign company. In this case, SSE-listed companies can gain access to a broader capital market abroad, whilst LSE investors can trade GDRs issued by SSE-listed companies as a way to invest in Chinese companies.
Eligible companies listed on the London Stock Exchange can issue Chinese Depositary Receipts (CDRs) in China and apply for these CDRs to be listed on the Main Board of the Shanghai Stock Exchange.
Note: Chinese depositorary receipts are similar to GDRs except that they trade on a Chinese stock exchange. It basically refers to shares in non-Chinese companies that trade in China and is a way for LSE-listed companies to broaden their capital base by accessing the Chinese markets. Conversely, mainland Chinese investors can trade CDRs issued by LSE-listed companies as an indirect way to invest offshore.
***LSE-listed companies CANNOT issue new shares to serve as underlying shares for CDRs. Only existing issued shares may be used. This means that LSE-listed companies cannot use the Shanghai-London Stock Connect as a tool to raise fresh capital in China's domestic market.
VS. the Shanghai-Hong Kong/Shenzhen-Hong Kong Stock Connect
The biggest difference between the Shanghai-London Stock Connect and the Shanghai-Hong Kong Stock Connect for retail investors is the scope of companies available to invest in.
Currently, the Shanghai-London Stock Connect only includes four Chinese GDR issuers: (1) Huatai Securities, (2) China Pacific Insurance, (3) China Yangtze Power, and (4) SDIC Power Holdings. In contrast, the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect combined offer a selection of approximately 1,700 mainland Chinese companies to invest in.
Due to the UK's condemnation of China's handling of the Hong Kong protests, further development of the Shanghai-London Stock Connect has more or less been halted since early 2020.
The Future of Shanghai-London Stock Connect
Due to long-lasting political tensions between China and the UK that most likely will not be alleviated any time soon, we don't anticipate the Shanghai-London Stock Connect to expand further, at least not in the near future.
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