The Shanghai-London Stock Connect has five Chinese companies listed that issue Global Depository Receipts or GDRs. There are 13 more Chinese companies listed on a similar stock connect with Zurich. The GDR failed to attract liquidity for Chinese companies listed and instead opened up opportunities for Market Arbitrage. This forced trade officials on both sides to conclude that they need to fine-tune their plans further to list Chinese companies on European stock markets.
Arbitrage opportunities have always opened up when companies issue GDRs. More so, in this case, because the Chinese companies offered GDRs at a discounted price. Hedge funds bought these GDRs and sold them immediately for a higher price in a different market.
The bigger underlying issue is the current volatility of the Chinese markets that are suffering due to Covid lockdowns. The issue has become a major bone of contention as both sides try to deepen ties in a geopolitically complex world. Chinese companies have been trying to diversify and strengthen their global footprint. And European markets seem to be the logical and easier choice to do so, considering China’s relations with the USA right now.
However, low trading volumes and hedge fund arbitrage have become roadblocks in the relationship. One Chinese lawyer in the delegation pointed out that some traders in Europe were designing hedge funds specifically to profit from the arbitrage opportunities.
London Stock Exchange Group is struggling to solve this chicken or egg problem. Traders keep citing risks for lack of interest in the investor community to Chinese exposure. Similar complaints have been reported by the SIX Swiss exchange. This has increased the list of woes for the Chinese companies, which are looking for investments in Europe.
The issuance for the Chinese companies listed on these markets is low and they have merely raised a few hundred million dollars in liquidity. Chinese companies, including Sunwoda Electronic Co Ltd and Hangzhou GreatStar Industrial Co Ltd, have canceled their GDRs in an effort to curb arbitrage.
LSEG is currently looking to increase listings of Chinese companies to increase investor interest in an effort to make the venture successful.
