Shanghai Stock Exchange spreads its net further through joint trading of ‘D-shares’ with Frankfurt
Reports suggest about 10 companies will initially receive the go-ahead to float D-shares in June
The Shanghai Stock Exchange is making further efforts to internationalise its business after a senior official unveiled plans to launch a so-called “D-share” market to trade yuan-denominated shares in Frankfurt, Germany.
Que Bo, a vice president of the bourse, said that a first batch of mainland companies will be traded on the China Europe International Exchange (CEINEX) – a joint venture between Deutsche Boerse AG and two Chinese exchanges that went live last month – in Frankfurt this year, creating a new listing venue for Chinese firms, according to the 21st Century Business Herald.
The joint-venture trading platform was created by the Shanghai Stock Exchange, China Financial Futures Exchange and Deutsche Boerse in November 2015, on which offshore yuan-denominated products including stocks, bonds and exchange-traded funds will be listed.
Shares in mainland companies to be traded on the CEINEX will fall into the category of D-shares.
The vice president didn’t elaborate on which companies would receive the green light from both the Chinese and German regulators to start trading on the D-share market, however.
But mainland companies will be allowed to either launch initial public offerings (IPOs) or place new shares on the CEINEX.
Que’s remarks reflect the mainland’s stepped-up efforts to connect local exchanges to overseas counterparts around the globe.
“Mainland companies desperate for funds will be interested in floating D-shares,” said Wang Feng, chairman of Shanghai-based financial services company Ye lang Capital. “They are awaiting clear-cut rules on the D-share market.”
On the mainland, A-shares refer to the yuan-denominated equities traded on the Shanghai and Shenzhen stock exchanges; B-shares are hard-currency shares traded on the mainland bourses while those mainland firms listed on the Hong Kong stock exchange are defined as H-share firms.
The Shanghai Stock Exchange has been striving to internationalise its businesses over the past decade.
In 2009, it announced plans to create an international board on which foreign companies would be able to raise yuan funds – but the plan has never been implemented.
In late 2014, a cross-border stock-trading scheme linking the Hong Kong and Shanghai stock exchanges was launched. A similar Stock Connect was launched between the former and Shenzhen on December 5.
The China Securities Regulatory Commission (CSRC) has also attempted to connect the Shanghai exchange with its London counterpart, but no time-frame for the plan has been revealed.
Former British Chancellor of the Exchequer George Osborne unveiled the plans during a five-day tour of China in September 2015, saying he wanted to create a link between the London and Shanghai stock exchanges, to allow funds to flow in both directions more easily.
Last year, the plan to create a new board designed for emerging industries was scrapped by the as the regulator shifted focus from reforms and liberalisations to market stability.
The board aimed at attracting Chinese technology firms traded in New York, which hoped to relist on the mainland to take advantage of the high valuations on the A-share market.
CEINEX is a result of China’s determination to internationalise the yuan with more yuan-denominated products traded outside the mainland, say experts.
D-shares could also help ease mainland firms’ thirst for capital amid a huge backlog of more than 700 IPO applicants on the A-share market.
Beijing temporarily halted IPOs in the second half of 2015 after a stock market rout wiped out US$5 trillion of market capitalisation.
The mainland leadership is pinning its hopes on the stock market to help hundreds of promising start-up firms access much-needed growth capital.
“At least, a small portion of the listing applicants could have an alternative to the A-share market,” said Ivan Li, a trader at Everbright Securities.
“Regulators will likely let more firms list D-shares in future if the first batch of Chinese companies are well received in Frankfurt.”
Beijing is now tightening foreign-exchange controls amid increasing pressure on a depreciating yuan.
The foreign-exchange regulator is containing capital outflow via a series of administrative measures while trying to direct an inflow of capital.
Fundraising by companies on overseas markets will be definitely encouraged to help Beijing build net inflow of capital, and not experience more of the opposite.
The 21st Century Business Herald reported that about 10 companies will initially receive the go-ahead to float D-shares in June.
The has also said it is planning to launch a registration-based IPO system, which would largely facilitate companies’ fundraising.
The current system reviews IPO documents and assesses their earnings potential before approving them to sell shares on the A-share market.
Under the new system, companies would be required to fully disclose details of their earnings and operations after submitting listing applications.
The regulator will be responsible for ensuring the truthfulness of the documents while letting the market decide their worth.
But it still isn’t known whether it will officially start the much-discussed IPO reform this year.
Last year, the regulator put the reform plan on hold to shore up investor confidence in a weak market.
“It’s certain that more Chinese companies will be allowed to raise funds on both the domestic and overseas stock markets this year,” said Wei Wei, an analyst with Huaxi Securities.
“After all, the stock market is supposed to support companies’ growth by letting them raise funds.”