How would the British and Chinese stockmarket tie-up really work?

The plan to connect the British and Chinese stockmarkets could open up China to UK investors, but some say the move is unnecessary.

In a speech at the Shanghai Stock Exchange last week, Osborne said Britain and China will “stick together” and announced the start of a feasibility study to link the London and Shanghai stock exchanges, but details are scarce on how this will actually work in practice. 

A London Stock Exchange spokesperson revealed that the study will look into the practicality of linking the exchanges, investor appetite, costs, type of products that would be involved in the trading and the partners who will help create the connection. 

According to LSE, the stockmarket link could replicate the existing Hong Kong-Shanghai Stock Connect programme, which allows investors in each market to trade shares on the other market using their local brokers.

Axa Wealth head of investing Adrian Lowcock sees the markets connection as a good step forward but says “it is early days” as there are still some challenges to be addressed to ensure it works. 

He says: ”Corporate governance, for example, needs to be maintained because the UK stockmarket as much as any other market needs to maintain a strong reputation especially among shareholders. There is a lot of potential there but also some risks that need to be managed. 

“China has been off the radar for a long time from an investor perspective. The rally and crash of the Chinese market is probably giving China more focus.”

Aviva Investors head of emerging market & Asia Pacific equities Will Ballard says the stockmarket connection will make transactions easier.

He says: “In one sense for international investors that could be quite interesting because it facilitates getting around a lot of surprisingly complex back-office issues. If you aren’t within an Asian timezone to use the Hong Kong-Shanghai stock connect that can be positive for China, especially if you can provide another source of international capital flows into the domestic Chinese equity market.”

One potential issue with the tie-up, if it mimics the Hong Kong-Shanghai stock connect programme, is settlement times, says Ballard. One of the current problems with the Chinese A-share market is that it settles in a shorter time period than is normal for western markets. 

He says: “That becomes an issue and you need to have your stock available when you look into trying to sell it, so it needs to be visible and you need to be able to deliver it at the same time if you sell it. So that has caused a problem for a lot of international investors to actually use the Hong Kong-Shanghai connection.”

However, the tie-up between the two stockmarkets would be more symbolic than real and would not be particularly advantageous, says Coutts UK chief investment officer Alan Higgins.

He says: “I am a bit sceptical on the benefits. Obviously we’ve got the equivalent of the Hong Kong-Shanghai connect in Asia and if you want to get access to Chinese shares that is easy enough to do. But what advantages are really out there? You can buy an ETF or a fund to access the Chinese domestic market.”

Although the tie-up with the UK would enable more transactions than the existing Hong Kong-Shanghai stock connect currently allows, Ballard says a big question mark remains over the Chinese markets, following the summer of market falls.

He says: “The proposed link doesn’t change the attractiveness of the domestic equity market for us when it comes to be a long-term investor. So we still have to ask ourselves, do we want to invest in these companies, are they trading at the right valuation, do they have the right long-term prospects, what’s our view on their outlook?

The stockmarket link up is ”more about the technicality of investing in a company rather than the relative merits of investing in them”, he says. 

Ballard adds that the UK is very reliant on financial services as part of its economy and it needs to keep being one of the prominent global financial hubs, which the stockmarket linking could aid.

He says: “China is a very big country, so London needs to tie itself into the future of China and the development of its capital markets is obviously very important. For China this could be an incremental benefit to be able to access additional capital flows – and right now it needs additional flows.”

The strategic geographical position of the UK is one of the perks of the planned link of the two stockmarkets, says Lowcock. “The UK and London are better positioned than any stockmarket. It is also one of the most international stockmarkets in terms of the companies listing.”