Chinese securities regulators want to give domestic investors access to non-domestic investments, while allowing some of the country’s biggest companies to tap fresh capital overseas. As a way of promoting diversification for blue-chips and for institutional investors, Beijing’s move makes sense. But for now, the benefits of the programme are skewed towards China.
Draft rules for the London-Shanghai “stock connect” programme stipulate that Chinese companies may raise equity capital through global depositary receipts on the London Stock Exchange. To create Chinese depositary receipts, however, international groups must use their existing shares. That is the case for HSBC, the UK-based bank, which is on course to become the first foreign issuer of securities on the mainland.
Meanwhile, if traders in London are getting excited about exposure to the likes of Tencent, whose Hong Kong-listed stock more than doubled last year, they shouldn’t. Candidates for a London listing must already have securities listed on the main board of the Shanghai exchange, according to a study by law firm K&L Gates. But companies cannot list shares in Shanghai without a record of making a profit, and valuations at initial public offering are subject to a cap. That rules out many tearaway tech stocks, which head for the lower bar of Hong Kong or New York.