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The Shenzhen Stock Exchange on August 17, 2020. Photo: Getty Images

Shenzhen sets up London Connect link, adding a second transborder funding channel between China and the UK for companies to raise capital

  • The Shenzhen-London Connect will enhance ‘capital market connectivity’ between China and the UK on depository receipts, indices and cross-border financing services
  • GDRs, under the cross-border stock connect initiative, have gained traction in recent months, as 41 Chinese firms are in the process of listing their GDRs overseas

China and the United Kingdom will extend their three-year-old transborder investment channel with a bridge between southern China’s technology hub Shenzhen and London.

The stock exchanges of Shenzhen and London signed an agreement on Tuesday to “advance the establishment” of a Shenzhen-London Connect to enhance “capital market connectivity” between China and the UK, where the two bourses will work together to issue depository receipts, indices and cross-border financing services, according to a statement by the Shenzhen exchange.

“The room for cooperation in the capital markets of China and the United Kingdom is relatively big, with [promising] potential”, said the Shenzhen exchange, home to 2,753 listed companies. The exchange said it would “constantly deepen mutual connectivity with overseas capital markets”.

The expansion is the second leg of a cross-border link between the two countries, three years after the establishment of the Shanghai-London Connect with the larger Shanghai Stock Exchange. The links enable Chinese companies to list their A-shares as global depository receipts (GDRs) in London and raise capital from European investors, in much the same way American depository receipts (ADRs) allow US-listed Chinese companies like Alibaba Group Holding and Bank of China to raise funds from US investors.

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GDRs are certificates issued by custodian banks to represent China’s yuan-denominated A-shares, and can be exchanged into the underlying A shares and sold in Shanghai and Shenzhen after a 120-day lock up period.
They have become an increasingly popular fundraising method for Chinese companies, as the New York Stock Exchange (NYSE) was declared mostly off limits to China-domiciled companies since Donald Trump’s presidency drove US-China relations to the lowest point in decades.
In addition to launching a trade war against China and banning Huawei Technologies, Trump enacted such laws as the Holding Foreign Companies Accountable Act (HFCAA) and ordered the expulsion of China’s three telecoms giants for being “Communist Chinese military companies”.

Chinese companies mostly stayed away from New York in 2022, driving last year’s initial public offerings (IPOs) on NYSE to a mere US$230 million, less than 2 per cent of the US$12.85 billion raised in 2021. That kept New York out of last year’s ranking of the top 10 global IPO destinations, where Hong Kong came in third place behind Shanghai and Shenzhen.

China’s capital market first pioneered its Connect scheme in 2014 with a Shanghai-Hong Kong link, which enabled Chinese investors to trade equities listed on the Hong Kong bourse, and allowed global funds to dabble in Shanghai’s A-shares via accounts in Hong Kong.

The Shanghai-Hong Kong Connect was extended to Shenzhen in 2016, and the Shanghai-London Connect was added in 2018. In December 2021, additional Connect links were set up to connect China’s capital market with Germany and Switzerland.

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China’s regulators last month drew up plans for the first time to end the otherwise mostly unregulated process of Chinese companies’ offshore listings. With effect from March 31, the China Securities Regulatory Commission (CSRC) will have the mandate to vet applications for offshore listings, including in Hong Kong and the US, accoridng to rules announced on February 17.

Chinese companies have been making tentative steps overseas to raise capital last year, mostly heading for the SIX Swiss Exchange.

Since the July 2022 listing of Shanghai’s machinery maker Keda Industrial, 36 of the 41 Chinese companies gearing up for offshore listings are all headed for SIX. They include the world’s largest solar panel producer Longi Green Energy Technology, Eyebright Medical Technology and the online financial portal East Money Information.

The two exchanges are steadily advancing the Connect programme under the coordination and guidance of regulators in both countries, and are making technical preparation for conducting the depository receipts operations to support companies to tap both markets for financing, the Shenzhen exchange said.