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By Dai Qi

Regulatory rules for the Shanghai-London Stock Connect mechanism released by China on Aug. 31 is seen as a step further for the program that will offer more choices for investors from the two sides.

The rules involve businesses in issuance, cross-border conversions, consistent regulations, supervision of law enforcement, as well as investor protection among others.

China’s securities regulators said they were open to public opinion for improving the released rules from Aug. 31 to Sept. 15.

The Shanghai-London Stock Connect, a connectivity mechanism between the Shanghai Stock Exchange and London Stock Exchange, provides a chance for qualified companies from the two markets to get listed for transactions at their counterpart through Depository Receipts (DRs).

There are two types of DR which are related to businesses in the east and the west respectively. The former refers to companies from the London Stock Exchange to become listed on the Shanghai Stock Exchange through Chinese Depository Receipts (CDRs). The latter is the other way around through Global Depository Receipts (GDRs).

The basic security for DRs is confined to stocks only for the sake of stability. Meanwhile, direct financing is not allowed in businesses in the east, which means CDRs have to be listed on the Shanghai Stock Exchange through cross-border converting institutions. 

At the same time, GDRs will be permitted to finance directly on the British financial market.

Given that GDRs are convertible with tradable A-shares on the financial market of the Chinese mainland, the issuance price should not be lower than 90 percent of the average price of the closing prices of the benchmark stocks within 20 trading days before the pricing ex-date.

Also, GDRs that are offered to the public initially overseas are not allowed to be converted to A-shares within six months from the listing date.

China Securities, one of the largest securities companies in China, predicted that investors might choose traditional sectors like finance, energy, industries and consumption in both Shanghai and London because of where the listed companies on both sides are mostly concentrated.

China Securities said the FTSE 100 Index would be the best choice for Chinese pilot companies who were allowed to put their transactions first.

Guotai Junan Securities, a financial service provider and investment bank in China, said the stock connect program between Shanghai and London was a critical step for the internationalization of the Chinese capital market.

Dong Dengxin, director of the research institution on finance and securities at the Wuhan University of Science and Technology, said the program is a win-win mechanism.

“For Chinese companies who are in a period of high-speed growth, it is a brilliant opportunity for them to raise funds from foreign investors,” said Dong.

On the other hand, for foreign investors, the program meant another channel to invest in the Chinese A-share market, Dong said.