City-Shanghai stock link: slow boat from China

Long-distance relationships can be fraught, as the chequered history of a stock trading link between the UK and China shows. Huatai Securities is trying to breathe life into the London-Shanghai Stock Connect by becoming its first listed company.

China’s fifth-largest brokerage priced its offering at the lower end of its range on Friday. It will raise up to $1.7bn, about a tenth of outstanding capital. European investors will get exposure through global depositary receipts quoted on the London Stock Exchange

Promoters say cross-listings between China and the UK will help open up Chinese capital markets. Buying China stocks has been challenging for private UK investors until now. Stock Connect makes it smoother, allowing trading in non-renminbi currencies and on UK trade settlement schedules. 

UK-listed companies should also be able to access new investors by listing in Shanghai. HSBC is one candidate. Chinese funds are forecast to grow fivefold to $17tn in a decade.

Sadly, Huatai’s timing is not ideal. Brexit and trade wars are weighing on sentiment. Slowing growth and climbing debt has made investing in China a less attractive proposition.

Ominously, demand has been weak for dual-listed Hong Kong stocks, such as Air China. The inclusion of mainland Chinese stocks in the MSCI Emerging Markets Index may lift demand.

UK investors will also be wary of China’s relaxed accounting and governance standards. These have resulted in high-profile scandals involving Chinese groups. The time difference also makes it hard to respond swiftly to corporate news.

Investors seeking the stable but lower blue-chip returns of Huatai and HSBC will have plenty of local alternatives. For UK investors seeking Chinese market exposure, a few stocks will not be enough. Distance is meant to make the heart grow fonder. For London-Shanghai Stock Connect, further low-priced issues would be a better remedy.

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