Stock Connect program enhances financial ties between China, Europe
Matteo Giovannini


Editor's note: Matteo Giovannini is a finance professional at the Industrial and Commercial Bank of China in Beijing and a member of the China Task Force at the Italian Ministry of Economic Development. The article reflects the author's views and not necessarily those of CGTN.

Financial markets have historically played a pivotal role in the promotion of a healthy development for countries by facilitating resource allocation and cross-border capital flows, and by guaranteeing a convenient access to capital for individuals, companies and government.

Over the last four decades China's leadership has been able to appreciate that the introduction of key market reforms and the launch of opening-up policies are fundamental steps for promoting an upgrade of the domestic economy and for meeting the expectations of foreign investors with regard to the world's second largest economy.

At the end of last month, Switzerland and China formally announced the launch of the Swiss leg of a joint platform for stock listings and trading, part of a project launched in 2019 by Swiss exchange SIX, the Shanghai Stock Exchange and the Shenzhen Stock Exchange. 

The platform, which is part of China's Stock Connect program, offers a reciprocal cross-listing framework that allows companies to raise capital by issuing and listing Global Depository Receipts (GDRs) on SIX, and Chinese Depository Receipts (CDRs) on Chinese bourses.

On the launching day, four Chinese companies (GEM, Gotion High-tech, Keda Industrial Group and Ningbo Shanshan) listed their first GDRs on the SIX Swiss Exchange, while on August 8 the Shanghai-listed B2B platform Beijing United Information Technology Co. announced its plan to issue GDRs on the same bourse.

The announcement of the agreement, that represents an important step forward in the cooperation among Swiss and Chinese stock exchanges, further cements a relationship that dates back to January 17, 1950, when Switzerland became one of the first Western nations to recognize the People's Republic of China.

A large screen by the roadside shows the trend of the A-share market in Shanghai, east China, July 29, 2022. /CFP

A large screen by the roadside shows the trend of the A-share market in Shanghai, east China, July 29, 2022. /CFP

In addition, the announced completion of a joint platform for stock listings and trading is a critical move that serves to promote a two-way opening-up of China's stock market. It acts as a potent stimulus for upgrading China's domestic capital market. This is because the collaboration with a leading financial hub in Europe such as Switzerland – which relies on a mature financial environment and capital market – could become a beneficial mechanism for the transfer of expertise to China.

An important aspect that must be underlined is that the collaboration between China and Switzerland cannot be considered as an isolated case but as the latest attempt to accelerate the development of the Stock Connect mechanism. In 2019, the Shanghai-London Stock Connect brought together one of the world's largest domestic capital markets with the leading international capital market building an infrastructure that can support the development of a vibrant financial ecosystem linking China with the United Kingdom and, by large, with the global economy.

In February this year, revised provisions by China's securities watchdog have further widened the perimeter of the Stock Connect to domestic and overseas stock exchanges with the inclusion of the Shenzhen Stock Exchange, along with the bourses in Switzerland and Germany.

The "China-Europe Stock Connect," resulting from the participation into the platform of Shanghai, Shenzhen, Frankfurt, Zurich and London, is set to dramatically improve investment targets for foreign investors. This will lead to an increased flow of international capital into China via Europe.

A stronger cooperation between China and Europe will be conducive to raise economic and trade relations to another level at a time when China's biggest U.S.-listed state-owned giants such as PetroChina, Sinopec and China Life are planning to exit Wall Street.

I strongly believe that a commitment to further open up trading relations between China and Europe through capital markets will not only be mutually beneficial but will also plant the seeds for a more financially integrated Eurasian continent.

From China's perspective, a widened Stock Connect mechanism with Europe guarantees a strategic alternative avenue for international funding of Chinese companies, beyond the homecoming listing in Hong Kong, and provides an important hedge on the growing risk of delisting in New York.

From Europe's perspective, considerations on China's economic growth trajectory and high-quality A-share companies offer an incredible opportunity for European countries to gain market shares and to avoid falling victim to a protectionist approach assumed by the United States.

All in all, China's announced upgrade in a joint platform for stock listings and trading with Switzerland reveals a much wider plan that, while advocating a reduction in a decades-long exposure and dependence to the United States' capital markets, is set to increase the level of financial connectivity with Europe through a higher degree of synergies on the Eurasian continent.

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