The expansion would include Shenzhen Stock Exchange and potentially European stock exchanges, and would permit overseas issuers to raise capital in China through CDR listings.

By Chris Horton, James Inness, Anna Ngo, Terris Tang, Cathy Yeung, and Johannes Poon

On 17 December 2021, the China Securities Regulatory Commission (CSRC) launched a consultation that proposes a major expansion to the scope of the Shanghai London Stock Connect programme. The Stock Connect currently allows eligible companies listed on the Shanghai Stock Exchange or the London Stock Exchange to list depositary receipts on the other exchange that can be traded under local rules in the local time zone.

The key proposals are:

  1. Expansion to the scope of the Stock Connect

Eligible issuers listed on the Shenzhen Stock Exchange would be permitted to access the Stock Connect, in addition to Shanghai-listed issuers who are already able to access the Stock Connect provided they satisfy certain eligibility criteria (including having a minimum market capitalisation of approximately US$2.9 billion). This would in effect provide mid- to large-cap Shenzhen-listed issuers the opportunity to raise foreign capital through a listing of global depositary receipts (GDRs) on the LSE.

Further, the Stock Connect would be expanded to cover Switzerland, Germany, and potentially other major European stock exchanges.

  1. Permitting offshore issuers to fundraise through a CDR listing in China

The Stock Connect permits LSE premium-listed issuers to list Chinese Depositary Receipts (CDRs) on the Shanghai Stock Exchange Main Board, but, under the current CSRC securities regulation, these issuers cannot raise capital from the Chinese domestic market.

The CSRC proposes to permit overseas issuers to raise capital in the Chinese domestic market through CDR offerings. The draft proposals indicate that these arrangements would be subject to certain requirements governing the use of proceeds complying with Chinese regulations regarding foreign capital and foreign exchange controls.

LSE premium-listed issuers would be able to consider a CDR listing in order to raise their profile within the Chinese market and at the same time effect a CNY fundraise.

  1. Other amendments to reporting and ongoing requirements

The CSRC proposes various amendments to Chinese securities regulation in order to minimise regulatory divergence across domestic and overseas exchanges. These include clarifications to the financial reporting and other disclosure requirements applying to overseas issuers.

These proposals are aimed at optimising the CSRC’s ability to supervise dual-listed issuers on the Stock Connect. As is the case in any dual-listing, LSE premium-listed issuers who wish to consider a CDR listing through the Stock Connect will need to ensure that they understand and comply with the requirements under each regime (paying particular attention to financial reporting and disclosure requirements) and take steps to implement the necessary policies and procedures ahead of closing.

These proposals represent the most significant updates to the Stock Connect since its launch in June 2019 and will increase its ability to attract cross-border listings from China- and UK-based issuers.