The Financial Conduct Authority (FCA) and the China Securities Regulatory Commission (CSRC) have today made a joint announcement of their approval of the Shanghai and London Stock Exchanges’ proposed new Shanghai-London Stock Connect. They have also published a memorandum of understanding (MoU) aimed at providing the basis for the regulatory co-operation that will support the success of the scheme.

Launching today at a ceremony at London Stock Exchange, the Stock Connect scheme is a reciprocal arrangement between the Shanghai Stock Exchange (SSE) and London Stock Exchange. It will encourage cross-border investment between the countries and provide investors and companies in the UK and China with mutual access to each other’s capital markets. A joint initiative of the two exchanges, the scheme’s development has been supported by Economic and Financial Dialogues between the UK and Chinese governments. Through today’s joint announcement and through the signing of the MOU, the two countries’ securities regulators have now lent their support too.

The two regulators’ joint announcement sets out high-level details of the scheme. The Shanghai-London Stock Connect will enable Shanghai-listed Chinese companies to apply to be admitted to trading on a newly formed Shanghai Segment of London Stock Exchange’s Main Market, while companies with a premium listing in the UK will be able to apply for admission to the Main Board of the SSE.

In both cases, the securities traded will be in the form of depository receipts. This investment structure is a tried and tested way of enabling overseas companies to access institutional investors in global financial centres like London.  However, the structure is new to China and offers Chinese investors a unique opportunity to gain exposure to international securities via an exchange located in their own country and currency. From a UK perspective, the scheme offers institutional investors a broader opportunity to gain exposure to the Chinese A-share market which has been historically restricted to those western institutions with ‘Qualified Foreign Institutional Investor’ status.

Signed in Madrid at the International Organization of Securities Commissions last year, the MOU sets out a framework for co-operation between the two regulators to support the success of the scheme. Among other things it aims to protect investors and combat cross-border market abuse and other serious misconduct.

Andrew Bailey, FCA’s Chief Executive commented:

‘This new scheme will deepen and strengthen connectivity between UK and China capital markets to the advantage of both countries.  We both believe in the positive contribution regulators can make in international capital markets, and the new co-operation we’re announcing today will be an important contributor to the success of the scheme.’

Source: FCA

Background

  1. The text of the MOU.
  2. The text of the joint announcement.
  3. The scheme has been developed by London Stock Exchange and Shanghai Stock Exchange. It was announced as a feasibility study in the 7th China-UK Economic and Financial Dialogue (EFD) in Beijing in 2015. The two governments showed further support for the scheme in the 9th EFD in 2017. It launches today at the 10th EFD in London.
  4. The Shanghai-London Stock Connect will be one of a suite of Stock Connect schemes entered into by the People’s Republic of China. The original scheme was the Shanghai-Hong Kong Stock Connect scheme, launched in 2014. In contrast to the Hong Kong scheme, which enabled Mainland Chinese resident investors to trade Hong Kong listed securities and vice versa, the Shanghai-London scheme will be based around encouraging cross-listings on the two venues via the issue of depository receipts. This means only the securities of those companies that apply to join the scheme and which then issue depository receipts under the scheme can be traded under the Shanghai-London Stock Connect programme.