China has taken further steps in financial liberalisation.
- Launched on 17 June: Shanghai-London Stock Connect
- Launched on 25 June: China-Japan ETF Connectivity
Now, UK and mainland Chinese firms can list on each other’s stock market and investors can trade these stocks in the form of depository receipts. Furthermore, Chinese and Japanese investors can invest in each other’s markets via locally listed ETF products.
China-Japan ETF Connectivity scheme
The China-bound (or Eastbound) ETFs are established by Chinese asset managers and track Japan’s stock indices. They are listed on the Shanghai Stock Exchange. The Japan-bound (or Westbound) ETFs are established by Japanese asset managers and track China’s A-share indices. They are listed on the Tokyo Stock Exchange. A total of eight ETFs have been launched, four in Shanghai and four in Tokyo.
Shanghai-London Stock Connect
Under this new programme certain companies listed either on the Shanghai Stock Exchange or the London Stock Exchange will be able to issue depositary receipts, (which represent ownership of their shares), on the other bourse. Investors can buy these receipts to gain exposure to companies listed elsewhere. Companies can sell them to diversify their sources of funding.
UK-listed firms would issue Chinese depositary receipts (CDRs) in Shanghai, but, slightly confusingly, Chinese-listed firms would issue “global depositary receipts” (GDRs) in London. While the names are different, they amount to the same thing.
The programe would allow investors on the Chinese mainland to trade the stock of a foreign company in their own markets for the first time. The more international London Stock Exchange already offers investors dozens of GDRs from many different countries
Remember, there are two main ways for overseas investors to access mainland Chinese stock markets
In China, they are launched under the Qualified Domestic Institutional Investor (QDII), Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) programmes.
Readers will remember that the two main ways for overseas investors to invest in the Chinese mainland’s stock markets are;
- Through the QFII and RQFII programmes, launched in 2002 and 2011 respectively.
- The stock connect programmes – The Shanghai-Hong Kong Stock Connect, launched in 2014 and the Shenzhen-Hong Kong Stock Connect, launched in 2016.
A further small step toward liberalisation of China’s financial markets
These new schemes mark another, albeit small, step in China’s incremental approach to open its capital account by establishing connectivity between the capital markets in China and the rest of the world (the UK and Japan in these cases).
At this stage these schemes should not be seen as game changers. Their initial importance is primarily symbolic but they do form part of China’s move to liberalise and open its capital markets.
Such schemes can be further replicated between China and other major financial centres and for bonds and other financial products if opportunities arise with other countries.
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