The London Stock Exchange Group offices are seen in the City of London, Britain, December 29 2017. Picture: REUTERS / TOBY MELVILLE
The London Stock Exchange Group offices are seen in the City of London, Britain, December 29 2017. Picture: REUTERS / TOBY MELVILLE

Shanghai/Beijing — China’s decision to suspend a tie-up between the Shanghai and London stock exchanges is less a blow for markets than a warning shot to Prime Minister Boris Johnson as he readies the UK for Brexit.

According to people familiar with the matter, the Chinese government has temporarily halted the Shanghai-London Stock Connect on political grounds. One person said Britain’s stance on the pro-democracy protests in Hong Kong is one of the issues that prompted the move, and that how relations with the UK proceed will determine whether the link is restored.

The timing is unlikely to be a coincidence, as Johnson seeks to strengthen trading ties with China after the UK leaves the EU in January, and with a decision looming on whether to allow Chinese tech giant Huawei Technologies to play a role in future British broadband networks.

Though the link between the two exchanges — designed to allow companies listed on one venue to issue shares on the other — has so far underwhelmed, its suspension is the latest indication of how ties have deteriorated.

“This break is pretty symbolic because the reality is our business practices do not align,” said Tom Tugendhat, a Conservative legislator who chaired the House of Commons foreign affairs committee in the last parliament. “China’s political response really speaks to a growing reality — their economic model is not aligned to a free market based on the rule of law.”

Sending a message

Chinese foreign ministry spokesperson Geng Shuang said he is “not aware of the specifics” of the stock exchange case. “I would just like to stress that we hope the UK will provide a fair and just and open, non-discriminatory environment for Chinese businesses to invest there,” he told reporters in Beijing on Thursday. “We hope it will create fair conditions for practical co-operation between the two countries.”

The China Securities Regulatory Commission and the Shanghai Stock Exchange did not immediately respond to requests for comment, while representatives for the London Stock Exchange and UK Treasury declined to comment.

“China has a fairly extensive track record in putting up informal barriers to trade or harming business relations as a way for the Chinese government to wield more influence over other governments,” said William Nee, a business and human rights analyst at Amnesty International’s Hong Kong office. “Beijing has been particularly sensitive to criticism of its conduct in Hong Kong.”

The UK-China relationship is now a far cry from the “golden era” imagined by former prime minister David Cameron, who wanted to reboot ties to Beijing via trade and investment. Tensions over the disputed South China Sea have played a part, but it’s events in the former British colony of Hong Kong that have done the most damage.

The two sides have been engaged in a prolonged spat over Beijing’s handling of pro-democracy protests in Hong Kong, which the UK returned to Chinese rule in 1997 on the agreement that the territory’s independent courts, capitalist system and democratic institutions would be maintained.

Despite calls from the protesters to intervene more, the British government initially limited itself to demands for authorities to show restraint and urging dialogue to defuse tensions — though even these interventions triggered an angry response from Beijing.

But Johnson’s government raised the stakes when it accused China of torturing a former employee of the British consulate in Hong Kong, and foreign secretary Dominic Raab summoned the Chinese ambassador in London.

The Chinese government warned at the time that further interference in Hong Kong “will eventually harm UK interests”.

A long-delayed decision on whether Huawei will be allowed to access the UK’s so-called 5G communications networks has the potential to fuel further tensions if Johnson succumbs to US pressure to ban the Chinese company on security grounds.

US warns of communication ‘risks’

The Financial Times reported last week that President Donald Trump’s administration has stepped up the pressure to block Huawei, citing an interview with US national security adviser Robert O’Brien. The US has warned allies that the Chinese government could gain a back door to communications networks, and has threatened to withdraw intelligence sharing.

The decision is fraught with risk, and Johnson has hinted the UK could follow some of its international security allies including Australia and New Zealand by restricting or banning the company — though he could seek a compromise by allowing Huawei to participate only in so-called noncore elements of the network.

“The hidden state subsidies to firms like Huawei, which are also said to co-operate with the human rights violations we’re seeing in Xinjiang, mean it is hard for our markets to trade on the same basis,” Tory MP Tugendhat said. “Co-operation is important to both China and the UK but that has to be based on reality.”

Resetting ties with China

For now, China’s decision to suspend the stock exchange tie-up has more symbolic than financial significance. Only Chinese company, Huatai Securities, has listed in London since the programme launched in 2019, while no UK companies have come to the Shanghai bourse.

Huatai’s global depositary receipts tumbled 11% in London following the news the link was suspended.

According to Pang Zhongying, a member of the Beijing-based Academic Committee of Pangoal Institution think-tank, Brexit provides Johnson — who won a large majority in December’s election — with an opportunity to reset ties with China.

“Britain needs to renegotiate a new trade and investment pact with its major business partners including China and US in the post-Brexit era, and that creates new opportunities for both countries,” he said. “As the world knows, the British government’s main focus is on Brexit and Hong Kong is absolutely not their priority.”

With Amy Li, April Ma, Viren Vaghela, Alex Morales, Dandan Li and Iain Marlow