More Chinese companies will be able to raise funds outside of China as the Shenzhen Stock Exchange (SZSE) on Tuesday became the second Chinese bourse after Shanghai to connect with the London Stock Exchange Group (LSEG).
According to the SZSE, the two stock exchanges signed a Memorandum of Understanding (MoU), allowing the two cities to “explore and advance multi-level collaborations” on market development, product innovation, and information exchange.
“The collaboration will cover issuance and listing of depository receipts, mutual information display of green securities, data partnerships, and market research, and joint development of indices and ETF tracking,” Sha Yan, the CEO of SZSE, said in a statement.
The SZSE said it will “implement the spirit of the 20th National Congress of the Chinese Communist Party [CCP] and the spirit of the Central Economic Work Conference” and deepen the connections with the international financial market.
LSEG Chief Executive Julia Hoggett said she’s “delighted” to sign the MoU. She said it is a testament to the LSEG’s commitment to “collaborate across a broad range of areas to facilitate the further development and enrichment of global capital markets.”
The new agreement is part of the CCP’s push to connect Chinese stock exchanges with their global counterparts, starting with the Shanghai-London Stock Connect scheme, which was mostly constructed under former Prime Minister David Cameron’s leadership, and hailed as a “groundbreaking initiative” and an important part of the long-term strategic financial partnership between the two countries by then-Chancellor Philip Hammond.
Since the launch of the Shanghai-London Stock Connect on June 17, 2019, a number of large Chinese companies—most of which are ultimately state-controlled—have issued global depository receipts (GDRs) through the scheme, including the China Pacific Insurance (CPIC), Huatai Securities, SDIC Power Holdings, Mingyang Smart Energy Group Limited, and China Yangtze Power, raising a total of $6.1 billion.
The government of Jiangsu Province is a significant shareholder of Huatai Securities.
The majority of China Yangtze Power Co. Ltd is ultimately owned by the Chinese central government with much of the remaining stake split between several local governments of Guizhou, Yunnan, and Shanghai.
SDIC Power Holdings is a subsidiary of the State Development and Investment Corporation—the largest state-owned investment holding company in China that’s directly managed by the Chinese regime.
Compared to floating original shares, the Connect scheme of GDR listing allows Chinese companies much easier access to international funding.
Under the scheme, eligible companies listed on one exchange are able to deposit their original shares with a local custodian bank and list the “receipts” issued by the custodian on the other exchange. Those receipts can be traded as normal shares.
With GDR listing, Chinese companies skip some of the tough requirements under listing rules for equity shares, such as three-year revenue tracking.
Under previous rules, although the scheme allowed Chinese businesses to raise new capital through issuing new shares for the UK listing, British companies would only be permitted to apply existing shares in any China listing, limiting the benefits to them.
The China Securities Regulatory Commission last year changed its rules on GDR, allowing offshore companies to raise funds in China. But there has been no report of overseas companies listing their stocks in Shanghai.
The scheme was also expanded to include stock exchanges in Germany and Switzerland.
Four Chinese companies—Keda Group, Shanshan new energy, GEM Co., Ltd, and Gotion High Tech, issued GDRs at the SIX Swiss Exchange when the China-Switzerland Stock Connect was launched on July 28, 2022.
