Introduction

About

During President Xi Jinping’s 2015 state visit to UK, China and UK governments issued a Joint Declaration on Building a Global Comprehensive Strategic Partnership for the 21st Century. In the Joint Declaration, the two governments announced that “Both sides support the Shanghai Stock Exchange(SSE) and the London Stock Exchange(LSE) to carry out a feasibility study on a stock connect.”

With the strong support of the Chinese and UK regulatory authorities, SSE and LSE have worked together on the stock connect feasibility study, the business plan and the preparations. In 2018, Provisions on the Supervision and Administration of Depository Receipts under the Stock Connect Scheme between Shanghai Stock Exchange and London Stock Exchange (for trial implementation) issued by the China Securities Regulatory Commission and supporting rules released by SSE laid the legal framework for the official launch of the Shanghai-London Stock Connect.

The Shanghai-London Stock Connect is a connectivity mechanism between SSE and LSEAt the initial stage, the stock connect allows eligible companies listed in each market to issue depository receipts (DRs) on the other exchange. A depositary receipt is a certificate issued by a depositary bank,representing underlying shares in a foreign company and traded on a local stock exchange.

The Shanghai-London Stock Connect includes a two-direction business, eastbound and westbound. The eastbound direction consists of LSE-listed companies listing Chinese Depositary Receipts (CDRs) on the SSE Main Board. In the westbound direction, the A-share companies listed on the SSE list Global Depositary Receipts (GDRs) on the LSE Main Board. At the initial stage, GDR issuers may raise capital on the London market, whereas CDR issuers could only list CDRs on the SSE market and not raise capital. The DRs and the shares they represent are fungible, thus bridging the two markets. According to the joint announcement released by the China Securities Regulatory Committee and the Financial Conduct Authority of UK, the total value of the westbound business is expected to be 300 billion RMB and the eastbound business 250 billion RMB.

The issuance and listing of Shanghai-London Stock Connect DRs are subject to local regulatory requirements, and issuers are required to fulfill their information disclosure obligations. Unlike the Shanghai-Hongkong Stock Connect mechanism, under which investors in Shanghai and Hongkong may trade shares directly on each other's markets, the Shanghai-London Stock Connect allows the cross-border listing of financial products by using the DRs to represent foreign shares. The trading and settlement mechanisms of DRs are similar to that of equities traded on local exchanges so that investors may carry out trading and settlement in the local trading hours without changing their trading habits. Currently, CDR traders are subject to certain investor suitability requirements. Investors enjoy the rights to dividends, rights issue, etc., and exercise the right to vote. Eligible brokers in both China and UK may apply for the license to conduct cross-border conversion in accordance with the relevant regulations.