The much anticipated Shanghai-London Stock Connect is expected to be launched in 2018 after over three years in the making, despite the challenges it might meet in the future. Investments are now expected to flow both ways more easily. Though the Stock link is promising, many challenges still lie ahead ? most notably the time difference and varying transaction modes.
“The most notable challenge is time difference for sure. Unlike the Shanghai-Hong Kong Stock Connect and Shanghai-Shenzhen Stock Connects, the Shanghai-London Stock link involves a time difference of eight hours,” said Yang Zhongning with Guodu Securities.
“The depository receipts methods will likely be used. With this method, Chinese shares can be traded on the London Stock Exchange, and vice versa. This way, we can break the barrier posed by the time difference,” said Ethan Wang, Head of Investment Strategy from Standard Chartered Bank, China.
China’s A-share market uses the T+1 transaction mechanism. For stock markets in Europe and the US, it’s T+0. In other words, investors can buy and sell shares within a single trading day in Europe and the US, while in China, they have to wait until the following trading day to finalize the transaction.
Methods such as the Shanghai-Hong Kong Stock Connect and the Qualified Foreign Institutional Investors, or QFII, have been introduced to let foreign capital flow into China’s A-share market. So why is the Shanghai-London Stock Link needed?
“The London Stock Exchange could be said to be the most important and biggest in Europe. Many excellent companies choose to go public here. Through the London Stock Exchange, we can further our investments in the European markets and even beyond that,” said Ethan Wang.
With the UK currently bogged down in “Brexit” negotiations, some experts say a stock link with China will help stabilize London’s edge among the global markets.
“It’s going to promote London’s financial market status, because of Chinese capital market’s potential ? it’s a big market, [and] it’s still growing. If London has a channel to invest in China’s domestic capital market, it’s going to improve London’s global financial status,” said Xu Minqi, the director of European Studies Center of Shanghai Academy of Social Sciences.
Meanwhile, others believe the Shanghai-London Stock Connect ? like the indices and tools provided by investment research firm MSCI ? will help purify management of China’s A-share market.