13 November 2018
London Stock Exchange chief executive Alexander Justham says much of the infrastructure is in place to realize the bourse's yuan-trading R-QFII ETF goal. Photo: HKEJ
London Stock Exchange chief executive Alexander Justham says much of the infrastructure is in place to realize the bourse's yuan-trading R-QFII ETF goal. Photo: HKEJ

London exchange plans next step in yuan direction

It’s just a matter of time before one of the world’s oldest bourses takes its next step to one of the world’s newest areas of growth, according to the exchange’s chief executive.

The London Stock Exchange Group aims to launch exchange traded funds that will give investors in London the chance to trade Chinese A shares in yuan under the renminbi qualified financial institutional investor (R-QFII) scheme.

Investors can already trade the shares in British pounds and US dollars but the planned funds would be the first time offshore investors in Britain will be able to do so in the Chinese currency.

Exchange chief executive Alexander Justham told EJ Insight that many of the pieces are already in position to realize the goal.

“[The yuan RQFII ETF product] would be the next development we would hope to see, but it requires relevant issuers [to facilitate it]. The infrastructure is already in place and we have worked very hard in the past few months, so it is just a matter of time,” Justham said, adding that he would be delighted to see it happen this year.

He said the growing internationalization of the yuan is a strong catalyst for the development of capital flows between various financial communities. That equation includes 19 dim sum bonds and the addition earlier this year of three RQFII ETFs denominated in yuan and traded in British pounds and US dollars.

On top of that, more than 60 growing companies from China have together raised close to £2 billion (US$3.36 billion) from London markets in the last decade. The exchange is keen to make the next move to either directly or indirectly help Chinese companies raise capital in yuan.

It also wants to expand its investor base from China and is promoting what it sees as its strengths in terms of time zone, market depth and regulatory clarity to increase the number of Chinese issuers and brokerages.

“We are allowing greater access to our marketplace through [the London and Chinese] brokerage community. We see a strong demand for that in terms of investment opportunity and we are supporting them developing business [in London],” Justham said, declining to detail initiatives.

The exchange’s case is bolstered by its strength in fundraising. London was second worldwide in the value of initial public offerings last year, according to Dealogic. It raised £8.59 billion from 59 IPOs between January and May this year, with double the number of debuts and a 200 percent increase in the amount raised compared with the same time last year. And Justham doesn’t see that environment changing any time soon.

“We see good demand from both [issuers and investors] and the prospect is quite strong,” he said.

“2013 is the most successful year since 2007, and the first quarter this year is, likewise, a successful one.”

Tighter IPO rules

However, the London market is looking to tighten its listing rules. Under reforms put forward by Britain’s Financial Conduct Authority late last year, majority shareholders in premium listed corporations will have to keep an “arm’s length” distance from the company and not interfere with day-to-day control, according to the Financial Times.

Premium listed firms will have to meet Britain’s highest standards of regulation while companies with standard listings need only meet European Union-wide standards.

The rules are expected to be finalized this summer.

Justham described the rules as sensible changes that have not come as a shock to the investment community.

“London is always evolving its listing criteria… The new rules are not materially changing the broad principle requirements for the listing, but just the free flow requirements between our different areas and some of the management of conflict of interest of the controlling stakeholders,” he said.

But it not everyone agrees. London-listed Jardine Matheson Holdings Ltd. said in March that it was applying to switch from premium to standard listing because of the forthcoming rules. 

“The proposed transfer to a standard listing will allow the group to maintain its existing structure and governance model. These are well suited to Asian conditions and have enabled each group company to take a long-term view in the development of its business and to produce sustained growth in shareholder value,” the company said.

The British listing authority approved the company’s transfer application late last month. The proposed change will include Jardine Matheson Holdings Ltd., Jardine Strategic Holdings Ltd., Dairy Farm International Holdings Ltd., Hongkong Land Holdings Ltd. and Mandarin Oriental International Ltd.

Michael Cheng, research director of China and Hong Kong at the Asian Corporate Governance Association and a former Hong Kong exchange listing official, said that new rules could be a barrier to entry for Chinese firms.

Cheng said change is happening on the mainland but given that state-owned companies comprise about 60 percent of the Chinese capital market, with the government the dominant shareholder in those firms, it might be difficult to lure those companies to London if they need to comply with the new rules.

Justham would not comment on whether the tighter rules will deter companies from listing in Britain, but stressed that the rules will lead to a more transparent relationship between issuers and investors. 

Joint efforts

He said the London exchange complements rather than competes with other bourses. That complementary approach is driving various exchange-related links around the world.

China Times reported in March that Taiwan’s GreTai Securities Market expected to sign a cooperation deal with the London and Singapore exchanges by the third quarter to advance the yuan secondary market. The London group also confirmed that it is in exclusive talks with Northwestern Mutual Life Insurance Co., the parent company of US-based index firm Russell.

“We are open and welcome to [any kinds of] partnership and interested in how we can partner with people,” Justham said.

“Russell would be complementary to our group. This is our strategic logic.”

The London group also owns FTSE Group Co., which has a strong presence in Europe, and 60 percent of European clearing house LCH Clearnet. And it bought MillenniumIT in 2009 and Borsa Italiana S.p.A, Italy’s main stock exchange, in 2007.

However, Justham is not optimistic about mergers and acquisitions of other exchanges. “We’ve seen more attempts at exchange consolidation fail than succeed. M&A is tricky in this space. There are always national considerations,” he said.

“We do not see a fundamental trend of consolidation going away… but I’d say it’s a difficult space to do M&As for regulatory reasons and all kinds of reasons.” 

– Contact the reporter at [email protected]


Ayishah Ma is a financial reporter on Greater China issues.

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