London, UK : Investor excitement over the much-anticipated plan to connect London and Shanghai’s stock markets gathered pace again on Thursday as London-based HSBC Bank grabbed headlines for potentially becoming the new scheme’s first offering.
The news was interpreted by analysts as an encouraging sign that preparation for the planned Shanghai-London Stock Connect is well on track for its planned opening by the end of this year.
HSBC said through a statement that it is currently “studying the proposed framework for the listing under the Shanghai London Stock Connect”.
HSBC is the first U.K. company to publicly state an interest in taking part in the program, which will allow firms listed on exchanges in either of the two cities to issue depositary receipts on the other’s venue.
“We are studying the proposed framework for the listing of Chinese depositary receipts under the Shanghai-London Stock Connect but cannot comment further at this time,” HSBC’s Hong Kong-based spokeswoman Vinh Tran said.
HSBC Holdings Plc is examining plans for the upcoming Shanghai-London trading link, a move that could see Europe’s largest bank list shares in China.
HSBC has been hoping to offer its shares to Chinese buyers since 2007, but its original plans faced critical challenges and were eventually dropped.
Under the framework of the Shanghai-London Stock Connect, a London-listed company such as HSBC could make its shares available to Chinese investors through the issuance of Chinese Depositary Receipts, or CDRs, a special instrument that trades like regular shares of stock.
While HSBC cannot raise new capital through issuing CDRs, if its CDRs are highly sought after by Chinese investors, that can have a positive impact on its share price in London.
In the other direction, global investors with accounts at London Stock Connect can access Chinese companies, by purchasing their Global Depositary Receipts, or GDRs, issued through the Shanghai end.
In addition to growing trading volumes, issuers of CDRs and GDRs can also benefit from the branding and marketing impact, said Jason Lui, head of Asia Pacific equity derivative strategy at BNP Paribas. “China is fast becoming the biggest consumption market for many international companies,” said Lui.
The progress of the Shanghai-London Stock Connect rides on a trend of international investors growing their asset allocation to Chinese stock, especially as the United States index provider MSCI included China-listed A-shares in its flagship Emerging Markets index earlier this year.
Global funds tracking this index had already started to buy more Chinese shares, mostly through a similar scheme that connects Shanghai’s stock market with that of Hong Kong. The London connect, which allows investors to trade in the London market time zone, could provide further convenience for many UK and European funds.
Jan Dehn, head of research at Ashmore Investment Management, said he expects that many international investors would look to buy Chinese shares through the connect, despite the short term volatility some Chinese stocks have suffered in recent times resulting from China-US trade frictions.
“Today, the opportunity in China, which has been good for some time, looks extra juicy due to this short-term volatility. China is entering bond indices and China’s weight in stock indices will continue to go up,” said Dehn.
“China continues to focus on developing and improving its (financial) market infrastructure and the stock connect is a great example. If markets pull back in the short-term (amid trade frictions), investors should pounce to take advantage of the excellent entry point,” Dehn said.
China’s stock market is currently the third-largest globally, but the percentage of stocks held by foreign investors has for years stayed around the 2 percent mark. Analysts believe the MSCI index inclusion effect will gradually drive more funds into Chinese stocks over the next few years.
An HSBC listing using the connection would be a boost for Chinese authorities, who have watched their benchmark index fall more than 20 percent this year amid a worsening economy and an escalating trade war with the U.S. The link is part of a broader effort to globally integrate China’s financial markets and internationalize its currency while maintaining some of the world’s strictest capital controls.
The plan to issue London Stock Exchange-listed HSBC shares in Shanghai is viewed as a symbolic step after years of planning, the Financial Times reported earlier, citing two unnamed people with knowledge of the matter.
“There’s strong demand for foreign stocks among mainland investors in China,” said Stanislas Beneteau, U.K. head of financial intermediaries and corporates at BNP Paribas SA in London. “We are seeing interest from clients.” The program could see 50 companies on the Shanghai and London sides list on each others’ markets within a few years, he said.
Expanding HSBC in key Asian markets including China is a core part of its strategy under John Flint, who became CEO in February. Asia contributed 77 percent to HSBC’s adjusted pretax profit in the first half.
Shanghai-London Link versus Hong Kong Connect
The LSE-Shanghai Stock Exchange link will give Chinese companies the ability to raise capital in Europe’s largest equity market. London-listed companies will be able to issue shares in China, but not raise fresh capital
The links between Hong Kong’s stock exchange and bourses in Shanghai and Shenzhen are direct trading links, where orders are placed at one venue and executed in another location
Both sides have said the link will start in 2018 H.K.-Shanghai started in 2014, while the link with Shenzhen began in 2016
Just one Chinese company has said it plans to list in London; HSBC is the first U.K. firm to express an interest More than 1,400 Chinese stocks are available to buy and sell via Hong Kong; Chinese investors have access to more than 300 Hong Kong-listed.
HSBC’s former Chief Executive Officer Stuart Gulliver said in May 2011 that he wanted the bank to be the first foreign financial institution to be listed on the Shanghai Stock Exchange under an earlier proposed plan to have foreign firms list in China. The company has roots in the city; its origins date to 1865, when it operated as the Hongkong and Shanghai Banking Corp. to finance trade in opium, silk and tea.
The Shanghai-London Stock Connect has been in the works since at least 2015, when then-U.K. Chancellor George Osborne visited China. Huatai Securities Co., China’s third-largest brokerage by value, has said it plans to list in London using the link. The program may be operational as early as Dec. 3, China’s state-run Shanghai Securities News previously reported.