Despite government efforts, China-Europe stock connects fail to take flight

China has taken recent steps to boost listings by its companies in Britain and Germany, but weak liquidity and geopolitical tensions remain big deterrents

Key Takeaways:

• Chinese listings under a 5-year-old connect program with London could get a boost by a new Labor government interested in improving Sino-British relations
• Chinese companies remain wary of European stock markets due to low liquidity, with no new listings recorded this year through programs in London, Zurich and Frankfurt

By Chen Ruzhen 

During an early December Sino-British investment conference in Shanghai, Jon Edwards, the London Stock Exchange Group’s (LSEG) chief China representative, courted Chinese companies seeking to tap international capital markets. “If you want to develop your business in Europe, or in the Middle East, we think the London Stock Exchange is your best choice,” Edwards told the audience, speaking in Mandarin.

He pointed out that the LSE is one of the world’s largest stock exchanges, has strong liquidity and a diverse investor base. And in a pitch to companies that might worry about future obstacles from an upcoming Donald Trump presidency, he pointed out that “If you don’t want to list in the U.S. due to geopolitical concerns, you can come to London.”

His pitch came a month before British Finance Minister Rachel Reeves’ planned visit to Beijing in early January, aimed at forging closer financial ties. It also came after a recent visit by Shanghai Stock Exchange officials to London, Germany and Switzerland to promote tie-ups.

The ramped-up activities underline a desire in both China and Europe to strengthen their business and financial ties as both sides grapple with slow growth and brace for potential trade wars under Trump, who has threatened tariffs on all exports from China and the EU to the U.S.

But some things are easier said than done. Despite several years of trying, several programs encouraging Chinese companies to list on European markets in Britain, Switzerland and Germany have very little to show for their efforts. Reflecting that, programs between those three countries and China signed up no new listings in 2024.

Many Chinese companies have lost interest in LSE listings due to strict procedures. Those same companies also balk at Switzerland due to a shortage of liquidity, heading instead to their traditional preferred offshore destinations in Hong Kong and New York where the IPO markets are recovering.

Many Chinese companies may also worry about increasingly volatile geopolitical winds. Sino-European relations have been shaken these last two years by China’s support for Russia’s war in Ukraine, a conflict in which the EU has squarely backed Ukraine.

On the trade front, the EU has also slapped tariffs of up to 45.3% on Chinese electric vehicle imports as Brussels maintains that Beijing doles out unfair subsidies to its auto industry. Highlighting the collateral damage, the China Association of Automobile Manufacturers (CAAM) has warned that the decision on the tariffs brings “enormous risks and uncertainty” for China’s operations and investment in the EU.   

Born in a “Golden Era”

The Shanghai-London Stock Connect scheme was launched in 2019, allowing China and UK-listed companies to list on each other’s exchanges by issuing depositary receipts (DRs). It was born in a Sino-British “Golden Era” characterized by a sharp increase in cross-border trade and investment, as well as annual high-level economic and financial talks.

But the program quickly lost momentum after then-Prime Minister Rishi Sunak, a Conservative, declared an end to the “Golden Era” with China in 2022.

Only six Chinese companies are currently listed in London under the connect scheme, and no new listings have occurred since chemicals maker Zhejiang Yongtai Technology Co. (002326.SH) floated shares in July 2023. Other listed companies include Yangtze Power Co. (600900.SH) and Huatai Securities (601688.SH). The program has yet to attract any UK-listed companies to sell Chinese DRs for trading on one of China’s domestic A-share markets.

UK Chancellor of the Exchequer Rachel Reeves’ two-day visit to Beijing next month is aimed at reviving high-level economic and financial talks that have been frozen lately, Reuters reported. The talks will focus on financial services and will include discussion of a resumption of the Shanghai-London Stock Connect, according to the Financial Times.

The current Labor government has made improving ties with China one of its main foreign policy goals. And, in fact, e-commerce fast fashion sensation Shein is reportedly talking with the LSE about listing its shares in London, after getting a cold shoulder for its first choice of New York. Such a listing could come as soon as next year, and would likely be the largest by a Chinese company in Europe by potentially raising billions of dollars.

Sluggish in Switzerland

The uphill climb the renewed London program will face is reflected in the China-Switzerland Connect program, the second oldest of such programs connecting Chinese companies and European stock exchanges. Following an initial Chinese rush to list on the SIX Swiss Exchange, Chinese companies have largely abandoned that channel due to a dearth of trading.

The Swiss exchange has hosted 17 Chinese listings to date including Lepu Medical (300003.SZ) and battery maker Sunwoda Electronic (300207.SZ). But trading in their GDRs is nearly non-existent, with stocks often going weeks or even months without any shares changing hands.

Such Swiss GDRs also frequently trade at a discount to their Shanghai-listed equivalent stocks. That leads arbitrage traders to often exchange those GDRs for their underlying A-shares, which they can sell for higher prices back in China and pocket some quick profits. The last Swiss listing by a Chines company occurred a year ago in December 2023 by Shenzhen Senior Technology Materials Co. (300568.SZ).

Titan Win Energy (Suzhou) Co. (002531.SZ) and Zhejiang Sanhua Intelligent Controls Co. (002050.SZ) both scrapped plans this month to list in Switzerland, citing changes in market conditions, joining more than a dozen Chinese companies that made similar decisions. In a separate statement, Sanhua said it now plans to sell shares in Hong Kong.

Shenzhen-listed battery maker CATL (300750.SZ), which had also planned a Swiss listing, is now also reportedly considering a Hong Kong listing that could raise at least $5 billion. “With positive momentum and increasing investor confidence in the Hong Kong IPO market, the city is becoming an increasingly attractive option from IPO applicants,” KPMG China partner Louis Lau wrote in a recent report.

Future in Frankfurt?

Meanwhile, the Shanghai Stock Exchange said it recently led some listed Chinese firms to visit not only Britian and Switzerland, but also Germany, to promote cross-border listing activity in all three countries.

The listing of Chinese companies in Germany dates back as early as 2018, when home appliance giant Haier sold global depositary receipts (GDRs) via the stock exchange in Frankfurt. But the program never gained much momentum. The potential for such cross-listings saw signs of new life last month when the Shanghai Stock Exchange (SSE), Deutsche Börse Group (DBG) and China Europe International Exchange (CEINEX), a Sino-German joint venture, signed an agreement for a new stock connect scheme linking Shanghai and Frankfurt.

Also last month, Shanghai-listed Jinko Solar Co. (688223.SS) said it plans to raise up to 4.5 billion yuan selling GDRs on the Frankfurt Stock Exchange to fund expansion.

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