Following the success of the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connects, China’s regulators are keen to roll out the link to London, in the latest example of China’s renminbi internationalisation strategy.
But the initial blueprint of the rules for the London-Shanghai Connect, published and under public consultation since the start of September, has raised more questions than it has provided answers for.
“The [China Securities Regulatory Commission] and the [London Stock Exchange] are both consulting on the London-Shanghai Connect but the consultations currently lack the necessary details,” Eugenie Shen, head of the asset management group at the Asia Securities Industry & Financial Markets Association (Asifma), told GlobalMarkets, GlobalCapital's sister publication. “Besides doing public consultations, they need to work closely with the buy-side and sell-side of the industry to iron out the operational issues of the Connect.”
Among the missing details that need sorting out are issues around fungibility, currency conversion, settlement and clearing, and other operational issues, said Shen. She pointed to the example of Chinese stocks’ settlement period of T+0 days, while the LSE settles on a T+2 cycle. Differences such as these will need to be worked out, as was done with the Shanghai and Shenzhen connects with Hong Kong, she added.
In their basic form, LSE listings by Chinese companies will be done through Global Depositary Receipts, which will be the same as traditional GDRs, except that they will trade on a special section of the London exchange, called the Shanghai Board. Foreign listings on the SSE will be through Chinese Depositary Receipts.
This is a big difference from the Hong Kong tie-ups, which used shares, not DRs. This change means more clarity is needed around the relationship between the DRs and the underlying stocks and how fungible they are, say market watchers.
And then there is a question about what currencies will be used for trading GDRs. The draft rules throw little light on that, with speculation rife about dollars, sterling or renminbi being used. But the dollar appears to have a natural advantage.