Stock Connect

London-Shanghai stock connect will address time zone difference

The head of London Stock Exchange reveals mechanism allowing investors in each city to buy and sell overseas-listed shares after trading hours

PUBLISHED : Wednesday, 16 November, 2016, 4:56pm
UPDATED : Thursday, 17 November, 2016, 11:21am

The head of London’s stock market has for the first time revealed details of how the proposed link between the London and Shanghai exchanges will bridge the time difference between the UK and China.

The planned London-Shanghai stock connect is a “new concept” in cross-border trade links, that will use a system of specially designated brokers to enable Chinese investors to buy and sell shares listed on the UK bourse outside its trading hours, said Xavier Rolet, chief executive of the London Stock Exchange.

The London-Shanghai stock connect will help promote globalisation
Xavier Rolet, chief executive, London Stock Exchange

Brokers and analysts have previously expressed concerns about the feasibility of the scheme because of practical difficulties presented by the eight-hour time difference between the two cities. The London market opens after the Shanghai exchange closes, and there is no overlap in trading hours.

“The London-Shanghai stock connect would be completely different from the stock connect between Hong Kong and Shanghai. This is a new concept of stock connect to allow Chinese investors to trade London-listed stocks after the London market closes,” said Rolet in an exclusive interview with the South China Morning Post at the London exchange headquarters.

Under the proposed mechanism, the London Stock Exchange would select a group of the top London-listed companies to be traded by mainland Chinese investors during Shanghai’s market trading hours. The London exchange would appoint designated brokers to act as market makers, while trades would be cleared and settled in Shanghai.

Likewise, Shanghai Stock Exchange will select a group of mainland companies to be traded on the London Stock Exchange via appointed market makers.

The system differs greatly from the Hong Kong-Shanghai stock connect, where the two markets are in the same time zone and have trading hours that largely overlap.

“The London-Shanghai stock connect will help promote globalisation,” said Rolet. “It will create a new bridge to connect the markets, allowing listed companies to be traded by more investors, and providing them with more investment choice.

“In the longer term, the companies will be able to raise funds in different markets via these connect schemes.

“The London-Shanghai Stock Connect is a very important project for both China and the UK. Both governments are very supportive of the link up and there are some big Chinese banks and brokers interested in the scheme.”

The British Chancellor of the Exchequer, Philip Hammond, last Friday announced that the London-Shanghai stock connect would proceed to the second stage, where details of regulatory and other issues would be examined.

Rolet said a timetable for the launch of the stock connect has not yet been set.

The scheme was initiated by the British and Chinese governments in 2015, kicking off with a feasibility study which will decide whether the new link is possible.

It will be the first cross-border trading initiative since Hong Kong Exchanges and Clearing (HKEX) linked up with the Shanghai Stock Exchange in November 2014 in a scheme that allows international investors to trade A-shares listed in Shanghai via Hong Kong-based brokers and mainland investors to buy and sell Hong Kong stocks via Chinese brokers.

A new stock connect scheme between the Hong Kong and Shenzhen bourses is also expected to launch soon.

Many analysts, including Louis Tse Ming-kwong, director of VC Brokerage, believe the new link between the London and Shanghai bourses would have an impact on Hong Kong, as it would enable international investors to trade A-shares via London instead of going through HKEX.

“If the London and Shanghai stock connect gets the go-ahead, Hong Kong would no longer be the only market to tie up with the Shanghai Stock Exchange,” Tse said.

The connect between the stock markets in Shanghai and London would only be suitable to those investors who do not sleep
Charles Li Xiaojia, chief executive, HKEX

But HKEX chief executive Charles Li Xiaojia last week sought to play down the potential threat, citing the time zone difference as a major obstacle to the success of the new scheme.

“The stock connect between Hong Kong and Shanghai and the soon-to-be-launched Hong Kong and Shenzhen link allow investors to conduct cross-border trading in the same time zone,” he said.

“London and Shanghai are in different time zones. When the Shanghai stock market opens, London brokers and investors are still sleeping. The connect between the stock markets in Shanghai and London would only be suitable to those investors who do not sleep.”

Rolet said the London-Shanghai stock connect would not compete with Hong Kong.

“It is not a zero sum game,” he said. “Having more connect schemes would add efficiency to the market. The new connect may not be successful in the short term but it’s likely to be important for market development 20 or 30 years later.”

The cross-border scheme with London is among several recent efforts by the Shanghai Stock Exchange to expand its international profile. It has emerged as a bidder for an up to 40 per cent stake in the state-owned Pakistan Stock Exchange’s main bourse, a deal which could mark the first major overseas investment by a Chinese stock exchange.

Rolet said the potential deal between Shanghai and Pakistan is another good example of co-operation among stock exchanges to harness the benefits of globalisation, reduce costs and enhance market efficiency.