China Pacific Insurance, the first insurance company to be listed in Shanghai, Hong
Kong and London, is set to become the second Chinese company to list global
depositary receipts (“GDRs”) on the London Stock Exchange (the “LSE”)
under the recently established Shanghai-London Stock Connect (“Stock
Connect”) scheme. The listing represents the latest example of a trend for
Chinese companies to seek an LSE listing, and thereby obtaining greater
access to the international investor pool. Huatai Securities became the
first Chinese company to list on the LSE under the Stock Connect scheme in June 2019
with its US$1.54 billion raising through the sale of its GDRs.
Stock Connect is a new scheme launched on 17 June 2019 connecting the LSE with the
Shanghai Stock Exchange (the “SSE”) so that companies listed on one market may now
issue, list and trade depositary receipts on the other market. The initiative marks a clear
relaxation of the Chinese domestic restrictions, allowing non-Chinese companies to
trade under Chinese national rules for the first time. Stock Connect has also opened up
an opportunity for Chinese companies to reach out to a new pool of investors in London.
Currently, there are only five Chinese companies listed on the Main Market of the LSE,
including Air China, one of the major Chinese airline companies, oil and gas company
China Petroleum & Chemical Corporation, and infrastructure company Zhejiang
The scheme is available to “westbound businesses” – namely, companies listed on the
SSE which issue GDRs on the relevant segment of the LSE, and to “eastbound
businesses” – LSE-listed companies issuing so called “Chinese depositary receipts”
(“CDRs”) on the SSE Main Board. CDRs and GDRs are fungible with the securities they
represent, being exchanged by a limited number of designated brokers from both
Historically, companies listed on the SSE have struggled to tap into foreign capital pools
due to a number of barriers that apply to non-China residents seeking to invest directly
in SSE-listed securities, including the need to qualify as a “Qualified Foreign
Institutional Investor” or “RMB Qualified Foreign Institutional Investor”. As a result of
the new initiative, Shanghai-listed companies will now have greater access to foreign
investors who are looking to benefit from the growth of Chinese companies, and can
raise funds by trading their GDRs admitted to trading on the Stock Connect segment of
the Main Market of the LSE. A GDR listing on the LSE will also help with raising the
public profile of Chinese issuers, as well as giving issuers greater exposure to
international research analysts. The inverse of this is that LSE-listed companies also
have the opportunity to diversify their investor base by selling CDRs on the SSE.
In order to benefit from the scheme, participating companies must meet the relevant
requirements of each market. SSE-listed companies looking to list in London must be
approved by the UK Financial Conduct Authority (the “FCA”), while LSE-listed
companies must be approved by the China Securities Regulatory Commission (the
“CSRC”) when listing in Shanghai.
Although the scheme is in its early days, market confidence in the potential of the Stock
Connect is evident from the upcoming listing of China Pacific Insurance, which is
expected to issue GDRs representing 628.67 million A shares with a nominal value of
RMB 1 (roughly 10 percent of the A shares of the company prior to the issuance). With
an estimated flotation of RMB 20 billion, the issuance is expected to be the biggest IPO
of 2019 in London.
The LSE has published its requirements for GDR issuers listing on the Stock Connect
segment. In addition to the eligibility criteria for being admitted to the Official List
maintained by the FCA, a Chinese issuer will need to comply with applicable Chinese law
have a minimum market capitalisation of RMB 20 billion (approx. US$ 2.9 billion);
be listed on the Shanghai Stock Exchange;
obtain CSRC approval;
have any newly issued shares admitted to listing on the Shanghai Stock Exchange;
satisfy the LSE’s free float requirement by having at least 25% of the GDRs held in
public hands in the EEA (subject to any derogation granted by the FCA).
The SSE has published the Interim Measures for the Listing and Trading of DepositaryReceipts under the Stock Connect Scheme between Shanghai Stock Exchange and LondonStock Exchange, which contain the requirements for a first time listing by an overseas
company of CDRs on the SSE. As well as complying with the general SSE requirements,
LSE-listed issuers must:
have an average market capitalisation of RMB 20 billion (roughly US$ 2.9 billion);
have been listed on the LSE for at least three years and have obtained a premium
listing for at least one year;
issue 50 million units or more of CDRs with an aggregate market value of at least
RMB 500 million; and
meet the Chinese requirements for depositary receipts and public offerings, and
obtain approval from the CSRC.
However, CDRs may not be used to raise additional capital and are only available to
investors with at least 3 million RMB (roughly US$421,000) in financial assets.
Stock Connect GDRs are admitted to a new “Shanghai-London Stock Connect” segment
(the “Shanghai Segment”) of the Main Market of the LSE (whether with a premium
listing or a standard listing), and traded through the LSE’s International Order Book.
The Shanghai Segment is open for trading from 09:00 to 16:30 (GMT/BST), which
means that trading takes place during London trading hours and under London trading
rules. Clearing and settlement take place through LCH and Euroclear Bank, respectively.
Stock Connect CDRs are listed on the Shanghai Stock Exchange Main Board. Chinese
trading hours apply, and clearing and settlement takes place in China Clear.
Designated brokers enable cross-border trading of GDRs and underlying A Shares, or
CDRs and underlying securities, respectively.
The SSE manages the process of approving GDR designated brokers. In order to qualify, a
firm must have full LSE membership, comply with the SSE rules, and be a “Qualified
Foreign Institutional Investor” or “RMB Qualified Foreign Institutional Investor” (or under
their control). CDR designated brokers are SSE firms specially approved for this purpose.
Under applicable CSRC regulations, designated brokers (as well as investors in Stock
Connect GDRs generally) will not be able to redeem any GDRs in the first 120 calendar days
from the listing. The CSRC also applies certain other restrictions, including caps on crossborder capital flows, caps on the size of issuances, and restrictions on holdings by individual investors and on pricing of the GDRs.