Chinese Stock Listings in Europe Face Liquidity Hurdle

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Li Gu and Tom Westbrook

SHANGHAI/SINGAPORE, Reuters - China’s ambitious plan to list its companies on the London and Zurich stock exchanges needs fine tuning, analysts say. The sparse liquidity of traded Chinese companies has created arbitrage opportunities for investors.

In the four years that it has been in operation, only five Chinese companies have issued Global Depository Receipts in London. Another 13 Chinese companies are listed in Switzerland through a rival Connect link. GDRs are a way for investors to purchase shares in foreign companies on their local exchanges.

A small group of participants failed to create enough demand for Chinese firms listed on those bourses but attracted investors that exploited price anomalies.

Arbitrage opportunities arise as soon as GDRs are issued by companies, often at a discounted price to attract investors. Hedge funds swap GDRs with their China-traded counterparts as quickly as possible to pocket the difference in price.

Miles Jian is an analyst with a China hedge fund. He said that after subtracting all costs they expect to make a 4-5% profit from the GDRs.

Investors are wary about the falling turnover and this is threatening China's goal to create alternative financing avenues.

John Edwards said that a growing number Chinese companies are looking to expand their global reach in a world with a complex geopolitical landscape. "It is more sensible for them to raise capital in Europe or the United Kingdom rather than the United States," he added.

He said, "...having low trading volume is not good. Hedge fund arbitrage is bad. We don't want to use it as a capital raising channel in the future.

A Chinese lawyer stated that many investors are swapping GDRs for A-shares, and some brokers have even designed derivative products to lock such profits.

No quick fix. A fix takes time and is not easy. However, officials at the government and bourse are working hard to find a solution.

Recently, the London Stock Exchange Group and UK trade officials visited China to promote UK financial markets.

Wilson Xu from CITIC Securities, a veteran banker who pioneered the Stock Connect program, says that liquidity will improve once there is a critical number of Chinese listings.

Shanghai-London Stock Connect launched in 2019, and expanded the link last year to include Shenzhen, Switzerland. Soon, a similar programme linking China and Germany will be launched.

Low trading volumes were attributed to the SIX Swiss Exchange's low appetite for Chinese exposure due to the current difficult market conditions, and novelty of GDR instruments.

Due to arbitrage, almost all companies such as Sunwoda Electronic Co Ltd or Hangzhou GreatStar Industrial Co Ltd had to cancel their GDRs once the holding period was over.

SIX's arrangement to allow about 2.5 hours per session of trading for Chinese GDRs did not help.

They condensed the information into this small window to squeeze out more liquidity. "It hasn't been successful," said Jon Edwards. China Chief Representative of LSEG.

Edwards said at a conference to promote the Shanghai-London Connect that "for many of ours you saw arbitrage funds participating".

Chinese companies have, however, been very positive about their ventures into Europe, which has given them a new channel through which to access funds and foreign currency.

Sunwoda Electronic, Hangzhou GreatStar and Reuters did not provide any comment. GreatStar stated in an earlier press release that their remaining GDR share count was now less than half of the initial issuance.

Dean Ding of Standard Chartered Bank's Securities Services, who spoke at a recent conference, explained that one other obstacle for companies looking to attract long-term investment into Chinese GDRs was the fact that many institutional investors have already had exposure to Chinese stocks via other cross-border channels such as Qualified Foreign Institutional Investor Programme or China-Hong Kong Stock Connect.

London has been working on a solution to the chicken-and egg dilemma.

A trade UK official, who declined to give his name, said that we need a certain number of listings in order to have a large enough investor base for liquid markets.

London is awash with long-only sources of capital, which are vital for the success of Connect.