Foreign Companies now able to list on a Chinese Stock Exchange
The China Securities Regulatory Commission (the CSRC) and the Financial Conduct Authority of the United Kingdom (the FCA) approved the launch by the Shanghai Stock Exchange (the SSE) and London Stock Exchange (the LSE) of a new relationship, the Shanghai-London Stock Connect (the Stock Connect). This initiative is designed to provide investors and listed companies in the UK and China with mutual access to each other’s capital markets for investment and financing activities.
The Stock Connect is a two-way arrangement between LSE and SSE. It comprises of ‘eastbound’ and ‘westbound’ limbs:
- Under the ‘eastbound’ limb, eligible companies listed on the LSE will be able to issue Chinese Depository Receipts (CDRS) to Chinese investors.
- Under the ‘westbound’ limb, eligible companies listed on the SSE will be able to issue Global Depository Receipts (GDRS) to UK and global investors.
This marks a significant difference between the new Shanghai-London Stock Connect and the existing Shanghai-Shenzhen-Hong Kong Stock Connect. The latter supports investors in the two places directly buy and sell stocks at each other’s markets. While the “investors” cross the border, the products are still in the other market. The Shanghai-London Stock Connect converts the stocks of the other market into Depository Receipts (DRs) to the local market, so the “products” crossed the border, but the investors are still in the local market.
So, what is a DR? DR is issued by a bank representing the shares in a foreign country traded on a local stock exchange. This allows for investors to hold shares in the equity of foreign countries and gives opportunity to trade in international markets.
In a nutshell, this means that large companies that have already been listed in the UK will be allowed to issue a form of share in Shanghai, while Chinese companies will be able to raise capital in London. This represents the next step in China continuing to open up its markets to the outside world.
The announcement comes at a good time for both countries. China, embroiled in a trade war with the US, is allowing wealthier mainland investors to diversify their risk, and some companies (with state approval) will have more options to look internationally for financing. For the UK, as Brexit continues to cause economic uncertainty, the initiative demonstrates increased confidence in global trading ties with Asia.
Earlier, Hua-tai Securities announced that their plans to issue GDR have been approved by the China Securities Regulatory Commission and the UK Financial Supervisory Authority. The number of GDRs issued by the company was 75 million, and the price was US$20.05 per GDR. The total amount of funds raised was US$1.54 billion. In addition, according to the over-allotment arrangement of the GDR, the stable price operator can also require the company to issue an additional share of no more than 7 million GDRs by exercising the over-allotment option. Assuming that the number of GDRs to be issued has reached the upper limit and the over-allotment rights are fully exercised, the total amount of funds raised this time is US$1.7 billion.
As with all companies using the Stock Connect, London traders won’t be able to buy and sell Hua-tai shares. Instead they will trade in depository receipts, or a representation of ownerships of company shares that are held by a custodian bank. This is largely because of the time difference between the countries.
China also has put in rules to encourage smaller investors to remain close to home. These include requiring retail investors to have at least 3 million RMB ($433,000 USD) to invest twenty days prior to opening a trading account (not including margin trading capital). For Chinese companies, there are limitations on who can list – they must have a market capitalization of 20 billion RMB ($2.9 billion USD).
Data on China A-Shares is limited to come across, let alone information that is dependable, deep, and crosses cultural and language barriers. This is compounded with a market that is marked by overall market volatility, official intervention in state-owned enterprises, and the liquidity of the Connect programs.
Kavout corporate operations in Beijing and Shanghai, in addition to Seattle, Washington, Kavout’s financial engineering team has boots on the ground. Given our international coverage, we are able to overcome the major issues typically associated with obtaining information about China A-Share.
The K Score is a rating and ranking system grades stocks between 1-9. The higher scores (7-9) indicate a higher probability for a given stock to outperform the market. A lower score (1-3) indicated that a stock will under-perform the market. In addition to China A-Share, the K Score is available for markets in the US, UK, Germany, and STOXX Europe 600.