China Securities Regulatory Commission Proposes Major Expansion of Shanghai London Stock Connect Program | Latham & Watkins LLP

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

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

The main proposals are:

  1. Extension of the scope of the Stock Connect

Eligible issuers listed on the Shenzhen Stock Exchange would be permitted to access Stock Connect, in addition to Shanghai-listed issuers who are already able to access Stock Connect, provided they meet certain eligibility criteria (including a minimum market capitalization of approximately USD 2.9 billion). This would in effect give Shenzhen-listed mid- to large-cap issuers the opportunity to raise foreign capital through a listing of global certificates of deposit (GDRs) on the LSE.

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

  1. Enabling offshore issuers to raise funds through a CDR listing in China

The Stock Connect allows issuers listed on the premium LSE to list Chinese Depositary Receipts (CDRs) on the Shanghai Stock Exchange Main Board, but under current CSRC securities regulations such issuers cannot raise capital in the Chinese domestic market.

The CSRC proposes to allow foreign issuers to raise capital in China’s domestic market through CDR offerings. The draft proposals indicate that these arrangements would be subject to certain requirements governing the use of proceeds in accordance with China’s foreign capital and exchange control regulations.

Issuers listed on the premium LSE could consider a CDR listing to raise their profile in the Chinese market and at the same time raise funds in CNY.

  1. Other Changes to Reporting Requirements and Ongoing Requirements

The CSRC is proposing various amendments to China’s securities regulations to minimize regulatory discrepancies between domestic and foreign stock exchanges. These include clarifications of financial reporting and other disclosure requirements applicable to foreign issuers.

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

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

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