Stock Connect

HSBC revisits plan to list shares in China as London-Shanghai stock link looms

PUBLISHED : Friday, 19 October, 2018, 9:50am
UPDATED : Friday, 19 October, 2018, 10:09am

HSBC Holdings has begun revisiting a plan to list its shares on the mainland, putting it on track to become first foreign company to issue depositary receipts on the mainland under the scheme that links the Shanghai and London stock exchanges.

The biggest lender in Hong Kong and Europe said in a statement on Thursday that it was studying the framework of the trading system, but would not comment further.

The remarks came after the Financial Times reported that HSBC would tap the connect to list shares on the mainland following an eight-year hiatus.

Under the depository receipts system, part of a company’s shares are transferred to a custodian bank before being traded by investors on an overseas bourse.

The stock connect scheme is set to become operational this year, according to the mainland securities regulator.

But the timing of an HSBC’s mainland listing remains cloudy due to a weak market sentiment.

Firstly, the mainland regulator is wary of massive fundraising from the beleaguered A-share market at a time when domestic shares have slumped to a multi-year low.

On Thursday, the benchmark Shanghai Composite Index fell 2.9 per cent to a four-year low of 2,486.42, bringing its decline for the year to 24.8 per cent.

The offering by HSBC is likely to amount to billions of dollars worth of yuan.

Given HSBC’s status as a leading global financial giant, it is likely that the offering will draw significant interest from mainland investors, drawing in investment flows and potentially putting pressure on other domestically-listed Chinese shares.

Secondly, the new link is different from the existing stock connect schemes linking the mainland and Hong Kong stock markets. Unlike the existing stock connects, the London link is seen as a symbolic rather than a substantive move to liberalise yuan-denominated shares market that are off-limits to foreign companies.

Hong Kong’s stock connect schemes with Shanghai and Shenzhen, launched in 2014 and 2016 respectively, enables cross-border trade in hundreds of large-cap stocks via local brokerages.

Under the London-Shanghai link investors are able to access only the depository receipts.

Foreign companies can issue Chinese depositary receipts on the Shanghai Stock Exchange and mainland companies offer global depositary receipts.

By using the depositary receipt mechanism, the mainland regulator is able to control the pace of share issuance to prevent an influx of fresh equity from flooding mainland exchanges.

It is believed that only individual mainland Chinese investors who have a capital base of no less than 5 million yuan (US$720,900) will be allowed to buy the Chinese depositary receipts.

Meanwhile, mainland investors with financial assets of at least 500,000 yuan are allowed to buy designated Hong Kong-listed shares via the existing connect schemes.

Thirdly, the escalation of the US-China trade war is forcing the regulator to reassess risks facing the mainland stock market.

As economic fundamentals are not expected to improve amid the worsening trade tensions, the China Securities Regulatory Commission will continue to take a cautious stance on major fundraising deals by companies like HSBC.

HSBC was one of the candidates to list on the so-called international board at the Shanghai exchange in 2010. The board, part of Shanghai’s efforts to transform itself into a global financial centre, was designed to attract global corporate behemoths.

London-headquartered HSBC pioneered the move to prepare for an A-share listing at that time, an effort that was later shelved. Mainland regulators backed down on the plan to launch the new board amid fears that a liquidity drain would drag down the prices of other stocks.

Analysts forecast that only Chinese companies will be given a green light to sell global depositary receipts when the London-Shanghai link is launched this year. Foreign companies are likely to be approved for the listing of depositary receipts in China only after the Shanghai market stabilises.