[ U P D AT E ]
Do we really
need a London-
China Stock
Connect?
INDUSTRY EXPERTS SEEM
TO HAVE OPPOSING VIEWS
ON WHAT BENEFITS A LON-
DON-CHINA STOCK CONNECT
WOULD BRING, SO WE LOOK
AT HOW THE SCHEME WOULD
BENEFIT INVESTORS.
A
fter several years of feverish specula-
tion, the People’s Bank of China (PBOC)
finally confirmed in April that it would
extend Stock Connect beyond Hong Kong
to London, allowing UK-based investors
to transact in mainland securities. This
decision concludes a fairly reform-heavy
18 months in the country, which has seen
the roll-out of Bond Connect and a sizeable
increase in Stock Connect’s daily trading
quotas.
“China has introduced a number of market
access schemes such as R/QFII, CIBM Direct,
Stock Connect and Bond Connect, and these
are very much welcome,” says Florence Lee,
head of China sales and business develop-
ment EMEA, HSBC Securities Services.
18
Global Custodian
Summer 2018
Read more:
Page 21 Third time lucky for China
as A shares get included in MSCI
Emerging Markets index.
“While the precise details have yet to be
ironed out for London-Shanghai Connect,
the scheme should enable more investors to
participate in China’s equity market.”
Such an initiative would let Chinese inves-
tors access the UK equity market, but would
also enable European, and perhaps even US
investors, to trade China A Shares through
the planned London linkage. There are even
studies being launched into whether a Lon-
don-China Mutual Recognition of Funds or
Bond Connect could work down the line.
Not all market experts are quite so bullish
about London-China Connect, and some see
the initiative as being more cosmetic than
anything else. Firstly, UK investors already
have exposure to mainland equities through
their regional brokers using the existing
Hong Kong Stock Connect programme,
so the need to a trade on a direct Lon-
don-Shanghai exchange linkage is ques-
tionable. Simultaneously, Chinese investors
can purchase UK securities with the help of
foreign subsidiaries of domestic brokerages.
Industry experts have also expressed
mixed opinions about the actual workabil-
ity of a London-Shanghai Stock Connect.
Glaring red flags which may impede the
idea’s success include Chinese limitations
on short-selling; divergent settlement time-
frames; the use of renminbi in settlements,
not to mention capital controls and frequent
share trading suspensions on the mainland.
However, China has a number of other
Connect-esque initiatives in the develop-
ment stages. ETF (exchange traded fund)
Connect has been touted for launch in late
2018, although ongoing issues remain,
namely an absence of a consolidated settle-
ment time-frame for ETFs on the Shanghai
and Shenzhen exchanges, and ongoing reg-
ulatory debate within China as to whether
an ETF is a fund or a security.
Another linkage under consideration –
which is likely to be launched in late 2018
or 2019 – is IPO Connect, also referred to as
Primary Connect. This scheme would allow
mainland investors to subscribe to Hong
Kong IPOs in what its proponents believe
will attract more international listings into
the city, attracted by the prospect of Chi-
nese money. Experts have said IPO Connect
is largely being driven by Hong Kong’s thirst
to win the much sought after Saudi ARAM-
CO l isting.