Huatai to kick off Shanghai’s cross-border investment channel with London on December 14

The Shanghai Stock Exchange will start a link programme with its London counterpart on December 14, with Huatai Securities among the first batch of Chinese stocks to be tradeable by UK investors, as the world’s largest emerging market opens up further to foreign investors, according to sources familiar with the plan.

Huatai will issue a form of global depositary receipts (GDRs) in London, with Citigroup among the custodian banks that will oversee the conversion between the receipts and ordinary shares, said the people who requested anonymity because the information is not public. A Shanghai exchange spokesman declined to comment.

The programme, called the Shanghai-London Stock Connect, is among several cross-border channels that are in place since 2014 to keep China’s capital market ajar, allowing domestic investors to buy and sell stocks in Hong Kong, while letting global investors get a taste of the country’s listed equities. Most class A shares listed in Shanghai and Shenzhen are inaccessible to non-resident foreign investors, while Chinese day traders aren’t allowed to transact in overseas-listed equities due to China’s capital controls.

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In addition to the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect channels, a Bond Connect is also being developed to integrate China’s bond investors with the global market.

The start of the long-awaited Shanghai-London channel comes three days before the 28th anniversary of the Shanghai bourse, as the exchange has spearheaded the Chinese government’s four-decade economic reforms and liberalisation. China’s stock markets, the world’s third-largest with a capitalisation of US$5.8 trillion, have also drawn increased attention from international money managers as they were added to MSCI’s global gauges for the first time this year and the regulator ramps up efforts to tackle issues raised by global investors.

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But the Shanghai-London link will not be for everybody, as the government has set a higher financial threshold for trading GDRs, to stem any exodus of foreign exchange from the currency markets. Chinese investors will need at least 3 million yuan (US$438,327) in their accounts to qualify to trade in GDRs, six times more than the threshold for trading Hong Kong shares, according to the Shanghai exchange.

Huatai, whose shares are already tradeable in Shanghai and Hong Kong, is among 216 Shanghai-listed companies that are eligible to issue GDRs in London. The Nanjing-based broker said over the weekend that it had won approval from the Chinese securities regulator to sell 82.5 million GDRs, priced at a maximum discount of 10 per cent of its Shanghai-listed stock. Shares of Huatai rose 2.6 per cent to 18.05 yuan in Shanghai on Tuesday and added 1.6 per cent to HK$13.64 in Hong Kong.

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Separately, UK-listed companies will issue a form of Chinese depositary receipt (CDR) in Shanghai, which are tradeable by Chinese investors. The CDRs are unlikely to be tradeable any time soon, said the people familiar with the matter.

HSBC, which can trace part of its establishment 153 years ago to Shanghai, said in October that it’s studying the framework of the trading system to issue CDRs. The bank, whose shares are already traded in Hong Kong and London, is likely to be among the first batch of CDRs in Shanghai, according to the people familiar with the matter.

According to the rules, foreign companies need a minimum market value of 20 billion yuan (US$2.9 billion) to qualify for issuing CDRs. They will have to issue at least 500 million yuan worth of CDRs.

(Corrects December 4 story to clarify that Huatai’s GDRs will start next week, while HSBC will be among the first batch of foreign companies to sell CDRs at a later stage.)