HSBC to be first foreign company to list in China

Investor excitement over the much-anticipated plan to connect London and Shanghai's stock markets gathered pace again on Thursday as HSBC grabbed headlines for potentially becoming the new scheme's first offering.

First reported through an article in the Financial Times, the news was interpreted by analysts as an encouraging sign that preparation for the planned Shanghai-London Stock Connect is well on track for its planned opening by the end of this year.

While HSBC has declined to comment, it did not deny the FT story. The bank further said through a statement that it is currently "studying the proposed framework for the listing under the Shanghai London Stock Connect".

The FT revealed through an unnamed source that HSBC has been hoping to offer its shares to Chinese buyers since 2007, but its original plans faced critical challenges and were eventually dropped.

Under the framework of the Shanghai-London Stock Connect, a London-listed company such as HSBC could make its shares available to Chinese investors through the issuance of Chinese Depositary Receipts, or CDRs, a special instrument that trades like regular shares of stock.

While HSBC cannot raise new capital through issuing CDRs, if its CDRs are highly sought after by Chinese investors, that can have a positive impact on its share price in London.

In the other direction, global investors with accounts at London Stock Connect can access Chinese companies, by purchasing their Global Depositary Receipts, or GDRs, issued through the Shanghai end.

In addition to growing trading volumes, issuers of CDRs and GDRs can also benefit from the branding and marketing impact, said Jason Lui, head of Asia Pacific equity derivative strategy at BNP Paribas. "China is fast becoming the biggest consumption market for many international companies," said Lui.

The progress of the Shanghai-London Stock Connect rides on a trend of international investors growing their asset allocation to Chinese stock, especially as the United States index provider MSCI included China-listed A-shares in its flagship Emerging Markets index earlier this year.

Global funds tracking this index had already started to buy more Chinese shares, mostly through a similar scheme that connects Shanghai's stock market with that of Hong Kong. The London connect, which allows investors to trade in the London market time zone, could provide further convenience for many UK and European funds.

Jan Dehn, head of research at Ashmore Investment Management, said he expects that many international investors would look to buy Chinese shares through the connect, despite the short term volatility some Chinese stocks have suffered in recent times resulting from China-US trade frictions.

"Today, the opportunity in China, which has been good for some time, looks extra juicy due to this short-term volatility. China is entering bond indices and China's weight in stock indices will continue to go up," said Dehn.

"China continues to focus on developing and improving its (financial) market infrastructure and the stock connect is a great example. If markets pull back in the short-term (amid trade frictions), investors should pounce to take advantage of the excellent entry point," Dehn said.

China's stock market is currently the third-largest globally, but the percentage of stocks held by foreign investors has for years stayed around the 2 percent mark. Analysts believe the MSCI index inclusion effect will gradually drive more funds into Chinese stocks over the next few years.