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Different time zones and settlement cycles, and the use of the renminbi as the settlement currency are just some of the obstacles a link-up between the London and Shanghai stock exchanges would have to overcome. Currently, London doesn’t open before Shanghai has closed.
But could the sheer weight of institutional demand bulldoze through them?
The announcement of the proposed link was a highlight of UK finance minister George Osborne’s September trip to China to drum up business in what is already the world’s second largest economy.
“Connecting UK and Chinese stock markets would allow the UK to benefit further from China’s growth and support China’s ongoing economic and financial reforms,” Osborne said.
A feasibility study into the Shanghai-London link will involve regulators, central banks and the exchanges themselves. China’s securities watchdog has already been making supportive noises, though it stressed that the time zone difference means there cannot be a cut-and-paste of the link that has operated between the Hong Kong and Shanghai exchanges since November 2014.
That link has become a route for overseas asset managers to get exposure to shares in China, something the LSE also hopes to become given that London is Europe’s biggest stock market.
An LSE spokesman was unable to say when the feasibility study on a London-Shanghai connection would be completed or give any further detail.
Rebecca Healey, a senior analyst at TABB Group consultancy, said the London exchange benefited hugely from its tie-up with Moscow in GDRs and ADRs, which worked well in its hey-day and could be a sign of how China might work too.
“It allowed institutional investors to gain access to the Russian market but within constraints that made it manageable to maintain safeguards such as counterparty risk,” Healey said.
In the past year the LSE has signed memorandums of understanding with most leading Chinese banks to help develop more products for trading such as yuan-denominated GDRs, bonds and ETFs.
The possible take up of A-share indices is also being looked at through the exchange’s FTSE Russell arm.
The London exchange has been putting down Chinese roots in other ways too.
China Construction Bank’s London branch became a member of the LSE in September, making it the LSE’s ninth member from Greater China. The LSE has also received regulatory approval from Hong Kong’s markets regulator to allow Hong Kong firms to become members of the UK exchange.
But the seeds of success may lay in another sector: asset management and the search for yield and better returns.
Healey said asset managers have little choice but to seek out investment opportunities further afield, outside their own backyards. The key issue will be how to make that work in practice.
A few years ago, a western link up with China would not have been possible given the differences in rules, supervision and practices, but the growing presence of the G20’s financial rulemaking task force, the Financial Stability Board, is helping to forge common approaches to markets, risk management and best practices.
“Since the financial crisis, there has been convergence in the global regulatory response to make management of risks more robust, which will help the globalisation of the asset management industry,” Healey said.
“The LSE- Shanghai tie up won’t be without its hiccups. Issues such as the time zone difference will create headaches that will require changes in approach for many which will involve increased use of technology,” Healey said.
“We saw Russia stepping up to the plate with improved corporate governance. China is keen to open its doors but we are in the very early stages and China may stumble in their first steps in this process,” Healey added.
The LSE and London also know that other exchanges and financial centres are already pushing at China’s door as it seeks to diversify its economy and offering a potentially wider range of shares to invest in.
On the same day that Britain announced a proposed London-Shanghai trading link, Euronext announced a partnership with the same Chinese exchange to “enhance the promotion and marketing of its cash, derivatives, commodities and index data” in China.
Deutsche Börse is also enlarging its footprint in Asia, and the CME has signed a an agreement with the China Financial Futures Exchange on data distribution
Some asset managers may want to wait a while, however, as western investors looked on in dismay at attempts by the Chinese authorities to interfere in how its stock market functions during the summer’s prolonged sell off.
