Shanghai-London Connect faces legal questions

But for now feasibility studies are pressing ahead.
LSE's Schwieger speaking at the LSEG Greater China Forum in HK
LSE's Schwieger speaking at the LSEG Greater China Forum in HK

The United Kingdom’s vote to leave the European Union has raised legal questions around a proposed trading link between the London and Shanghai stock exchanges.

The London and Shanghai stock exchanges have been working on a mutual market access programme since September, which would represent another important step forward in the opening up of China’s markets and bolster Britain’s efforts to attract Chinese investment.

“There are questions as to what will be the legal situation of London in the future – and that is understandable,” the London Stock Exchange Group’s head of equities Brian Schwieger told FinanceAsia.

Britain's vote to end its 43-year marriage to the EU has created uncertainty for such business deals and hit global stock markets, which lost about $2 trillion in value on Friday. Although shares globally have since recovered some poise, huge uncertainty still hangs in the air as the world awaits the formation of a new UK government and the start of divorce talks, whilst fretting about the future of the EU.

Schwieger’s comments on the impact of Brexit follow those of Shanghai exchange deputy general manager Que Bo, who said on June 12, prior to the UK’s referendum, that a vote to leave would be a complicated issue that would throw up legal challenges. 

“Bo is absolutely right in that respect. We do need to see what are going to be the legal arrangements in terms of the relationship between the UK and the European Union,” said Schwieger who was speaking on the sidelines of the LSEG Greater China Forum in Hong Kong. “We are relying on the politicians to find [or] negotiate an appropriate relationship.” 

For now, this uncertainty has not stopped work on the feasibility study. The LSE has already been in contact with the Shanghai bourse since last week’s referendum, said Schwieger, who reconfirmed the schedule for a team from London that is due to visit Shanghai later this month.

Still important

Senior participants in Chinese financial markets reassured the audience that London’s relationship with China remains important.

“As an important, international, financial hub London can play a major role in China’s financial opening, especially in the areas of capital account liberalisation and offshore [renminbi] market development,” said BOC International's chief executive Li Tong.

“The Shanghai-London Stock Connect which should present another step forward for China’s capital account opening has gained in importance on the agenda,” she told the audience.

The LSE has consulted investors and investment banks, including BOCI, on the best way to make the trading link work. It will need to be different from the Shanghai-Hong Kong Stock Connect that launched with much fanfare in late 2014. For one, the difference in time zones is a big complicating factor in the design of a Shanghai-London Stock Connect. 

Other challenges are the different trading holidays between the two countries, the difficulty for investors in shorting stock in China, and the cap on how much capital investors can bring out of the country.

Schwieger said his team has taken these issues into account as they designed the trading link. “We’re a long way down the road,” he said. 

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