London-Shanghai connect prompts cheers and jeers

London-Shanghai connect prompts cheers and jeers

Commentators are split on the impact of plans to link the British and Chinese stockmarkets.

On a trip to China earlier this month, chancellor George Osborne announced proposals to link the London and Shanghai stock exchanges.

Few details exist, but experts are basing their expectations on the Shanghai-Hong Kong Stock Connect. The initiative, which came into force last November, opened the gates of the domestic Chinese stockmarket to international investors. Until then, it was accessible only to asset management firms holding a Renminbi Qualified Foreign Institutional Investor licence.

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The new connect did not make the Shanghai index fully available, but allowed each international investor a certain quota of shares. Experts expect a similar scenario for the London-Shanghai connect.

Some UK professionals suggest the move could prompt a significant flow of money in either direction.

Neil Jones, investment manager at Hargreave Hale, explained: “China is still relatively new to stockmarket investing, so there could be huge amounts of money to be invested in the future.”

Mr Jones specified the Shanghai stockmarket would also benefit as “accessibility and confidence would increase, encouraging more money flow to Chinese markets from around the world”.

However, Capital Economics, the research and consultancy group, said the scheme is “more hype than substance” and will take a long time before getting off the ground.

In a research note, the firm’s China economist Chang Liu and Asia economist Mark Williams said: “The scheme is unlikely to have a large impact on the financial markets of either country.” Pointing to the Hong Kong-Shanghai connection, they added that “take-up [of that scheme] was weak, even when the Shanghai market was soaring”.

Chinese stocks have since reversed sharply and volatility has surged, deterring investor interest further. At the end of August, the Shanghai stockmarket experienced its worst day since February 2007, sliding 8.5 per cent after investors’ hopes that Beijing would loosen policy to stem recent selling proved unfounded.

Fund managers were wary of the connect at first, given the delays and technical obstacles that hindered its launch.

The team at Capital Economics do not expect a London-Shanghai launch to be any smoother. They added: “Given that there are obstacles unique to a Shanghai-London connect, such as the two markets being in different time zones, it’s likely that we won’t see the scheme launched for some time yet.”