Banking & Finance

Opening the sluice gates

Chinese hydropower firm latest to opt for a dual listing in London

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When the London Stock Exchange wanted to get in touch with far-flung members in Hong Kong in the late nineteenth century it would send them a telegram. They typically took 80 minutes to arrive, although that was much faster than messages previously sent by steam ship. Newly created telegraph companies were also busy laying lines across the East China Sea into Qing Dynasty China, defying imperial officials, who regarded the cables as a further encroachment on the country’s sovereignty. Inevitably, however, the business of making money trumped the political opposition.

Will that remain the case today as investment activity starts to flow in the opposite direction, with Chinese firms trying to raise capital in London?

The London Stock Exchange Group (LSEG) needs a constant source of fresh financial flows to maintain its status as a global centre of capital raising, not least because there’s less to extract from its domestic hinterland, which is so much smaller than China’s or America’s. For the past 20 years, it has struggled to compete with the NYSE and Nasdaq in attracting listings of Chinese companies. But it hopes that might change if the ‘America First’ policy extends beyond the forthcoming presidential election and Chinese companies continue to depart US exchanges.

The LSEG will be hoping that the handful of Chinese companies, which have sold shares in London this summer becomes the vanguard of a much larger group planning to take advantage of the London-Shanghai Stock Connect scheme (which was first mooted when Chinese leader Xi Jinping visited the UK in 2015).

They’ve certainly made a big difference to the exchange’s fortunes this year. In June, China Yangtze Power (CYPC) and China Pacific Insurance (CPIC) raised $1.96 billion and $1.8 billion respectively after floating on the LSEG’s international board. The two represented the second and third largest IPOs of the year on the exchange, behind online retailer The Hut Group, which raised £1.88 billion ($2.44 billion) in September.

SDIC Power, China’s third largest listed hydropower company, joined them at the end of last week, raising $200 million – and becoming the fourth Chinese company to use the London Connect Scheme, which was formally approved in June 2019.

The first was Huatai Securities, which raised $1.54 billion that same month. All four deals were structured as Global Depositary Receipts (GDRs). These allow investors to hold shares through the form of a receipt that represents a certain number of shares in the listed entity on the company’s home stock market (five shares in the case of CPIC’s Shanghai A-shares, for example).

GDRs have been around since 1990 when South Korea’s Samsung Corp decided to raise money from investors in both Europe and the US. They are a derivation of ADRs (American Depositary Receipts), which date back to the late 1920s – a period when European companies first started tapping US capital pools (British retailer Selfridges was a pioneer).

What makes the London Stock Connect Scheme unique is that it allows international investors to bypass China’s current investment quotas. Both A-shares and GDRs (fast becoming known as G-shares) are fungible with each other in the same way that A-shares and H-shares trade – tapping two separate liquidity pools through Hong Kong’s Stock Connect scheme with the Shanghai and Shenzhen bourses.

Getting more Chinese companies to list in London partly depends on the goodwill of the Chinese government – something that has been in shorter supply over the past two years. The London Stock Connect was forged at the height of friendly Sino-UK relations – the so-called Golden Era (see WiC300) – fostered by the Conservative government under then Prime Minister David Cameron.

Since then relations have deteriorated. This January – as the British government prevaricated on whether to ban Huawei from its 5G network – there were numerous media reports that the Chinese government was going to block the London listings plan completely. London’s Stock Connect hadn’t attracted as much business as it had first hoped. But that rumour suggested it looked doomed completely.

Since then the China Securities Regulatory Commission (CSRC) has resumed vetting of applications by Chinese companies to sell depositary receipts in London. The desire to access foreign capital certainly hasn’t dimmed amongst the candidates. CYPC, the world’s largest hydropower producer, used its IPO funds to repay a syndicated loan that had financed its $3.59 billion purchase of Peru’s biggest electricity distributor, Luz Del Sur. CPIC is deploying its proceeds on international expansion and SDIC is doing the same for its international renewable energy business (it owns Scottish wind farm operator, Red Rock Power, for instance).

Hong Kong is still the prime venue for Chinese companies that want to raise capital beyond Shanghai and Shenzhen. That status is only being enhanced by new policies in Washington that will make it more onerous to sell shares on American exchanges (notably Ant Group has chosen Hong Kong and Shanghai rather than the US for its record-breaking IPO: see this week’s “Talking Point”).

The US is still the main alternative to Hong Kong as a fundraising centre for Chinese firms and may regain some of its momentum if a new US administration adopts a more emollient approach towards Sino-US relations after next week’s election. Ping An’s fintech offshoot, Lufax Holdings, priced a $2.36 billion IPO on the NYSE only yesterday.

However, the number of candidate companies is dwindling and the broader trend is for firms to depart the US and then relist in Hong Kong or Shanghai. These departures are attracting all of the headlines: Sina Corp, SMIC, 58.com and Bitauto being some of the most high profile to date.

In May the US Senate passed legislation preventing Chinese companies from selling shares on US bourses if they don’t meet US accounting standards by the end of 2021 and a tough stance towards China is one of the few areas attracting bipartisan support in American politics. Senator Marco Rubio, a China hawk, is leading the charge, introducing legislation on Monday that would ban American investors from buying shares in Chinese companies on a Commerce Department blacklist.

On the other side of the Atlantic, the UK has a centuries-old reputation for favouring a more laissez-faire approach, which brings benefits when other governments are taking a more restrictive stance.

Most famously, tax restrictions designed to discourage US citizens from investing overseas in the 1960s led to the emergence of the Eurobond market in London (European companies still needed to raise US dollars to fund their overseas projects and Square Mile’s bankers created a structure that allowed capital raisings in Europe – arranged in London and bypassing New York).

However, the UK also has a reputation for toeing the US line when its main ally demands it. Earlier this month The Times reported that British Chancellor Rishi Sunak was setting up a consultative process to give the government powers to ban companies from doing London listings on national security grounds. This follows an outcry over the 2017 IPO of energy group EN+, which was then controlled by US-sanctioned Oleg Deripaska, an ally of Russian President Vladimir Putin.

Russian companies have been one of the LSE’s biggest success stories over the last 20 years, particularly from the resources and financial sector. They’ve helped to cement the exchange’s standing among global energy investors, explaining why the newer roster of Chinese IPOs largely comes from the same sector.

Many years earlier China National Petroleum Corp and Zhejiang Expressway listed in London in 2000, followed by Air China in 2004. But activity then petered out.

The LSEG will be hoping that Stock Connect offers an opportunity to get things moving more rapidly and that political drama will not get in the way of the Square Mile winning dual listings from a flood of Chinese firms.

In that light, SDIC’s arrival in London last week will give the bourse another boost.


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