Politics upends London-Shanghai stock linkage

It’s always easier to put up a barrier on an empty road than a busy highway.

That’s worth remembering in light of recent reports that China has temporarily suspended cross-border listings between the Shanghai and London stock exchanges. The halt is a response to the UK’s stance on pro-democracy protests in Hong Kong. Any resumption would depend on how diplomatic relations proceed.

China has denied the reports that the link had been halted. The China Securities Regulatory Commission, the country’s securities watchdog, said operations at the link had been “normal” since its launch in June.

More expectation than delivery

The pipeline between these two major financial hubs launched with the aim to allow companies listed on one exchange to issue shares on the other. The program was feted as a vote of confidence in a shrinking UK IPO market: 2019 marked one of London’s worst years in a decade for new listings, as companies worried about Brexit delayed their capital-raising plans.

As recently as September, optimism remained intact. The London Stock Exchange even cited the Connect programme as a better way to forge ties with China when it snubbed a bid by Hong Kong Exchanges & Clearing Ltd last year.

But interest has been minimal. Seven months in, just one mainland firm has used it: Huatai Securities Co., which raised $1.7 billion in a UK IPO in June. While its stock has surged, volumes were thin.

In December, an average of 123,914 London-listed shares changed hands daily, compared with 106 million for their Shanghai counterparts, and well below an October peak of 381,976. SDIC Power Holdings Co. was set to be the second Chinese company to list there, yet it postponed plans in December, citing market conditions. On the other end of the link, not a single British company went public in Shanghai. Talk that HSBC Holding Plc would be London’s first candidate have gone ominously quiet since the UK lender entered Beijing’s bad books for providing information that led to the arrest and prosecution of Meng Wanzhou, chief financial officer of Huawei Technologies Co.

Not much of a rationale

The Shanghai-London Connect never made much sense for Chinese firms from a capital-raising perspective. Unlike New York, London doesn’t have a deep bench of institutional players eager to get their hands on mainland start-ups.

In most markets, investors are biased toward stocks they recognise. And while the pipe enabled Chinese and British companies to raise money in each other’s markets, investors weren’t allowed to trade between exchanges, as they do with similar links between Hong Kong and the Shanghai and Shenzhen exchanges.

It’s worth noting that China hasn’t blocked its firms from going public in the US, which has also shown support for Hong Kong’s protesters. Mainland companies listed on the New York Stock Exchange and Nasdaq have a current market value of about $1.5 trillion.

Given that China Pacific Insurance Group Co. and SDIC Power were slated to raise offshore money from listings in London through this pipe, the real losers of a prolonged suspension might be mainland companies. If that’s the case, the link could very well be reinstated at some point.