When it comes to trading dodgy stocks, the UK and China deserve each other

“Did I mention how much I need your money?”
“Did I mention how much I need your money?”
Image: Reuters/Aly Song
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The UK government wants to link its stock market with China’s and has launched a feasibility study to look at the idea, British chancellor George Osborne said in a speech today (Sept. 22) at the Shanghai stock exchange.

“I want to see our stock markets in London and Shanghai formally connected, with UK firms raising funds from Chinese savers, and Chinese firms listing in London,” the chancellor said.

This could be dicey. The Chinese stock market is not known for tough regulatory oversight. When China’s stock exchanges started a similar link with Hong Kong late last year, it created massive volatility and huge valuation bubbles at some companies, as mainland China investors rushed in and out of different stocks. China’s stock markets are dominated by individual investors who make their decisions based on everything from rumors to which companies are featured on the state-run news programs.

Philippa Allen, CEO of the consulting firm ComplianceAsia, told Quartz at the time of the launch of the Shanghai-Hong Kong Stock Connect that inherent non-compliance among companies listed on the Chinese stock exchange was a big problem. “You’ve got massive amounts of insider dealing, massive amounts of manipulation in that market,” she said. “There’s no sense of governance and there will be some firms that choose not to be involved with it.”

Chinese citizens will also be pleased by the potential London-Shanghai marriage because the government currently restricts what they can invest in. Limitations on investment options currently leaves hundreds of millions of Chinese savers looking for places to put their cash. Bank deposit rates are very low, so if they want to make a return their choices are local  property markets, stock markets, and risky homegrown ventures like Fanya Metals Exchange. The air is coming out of China’s overinflated property markets, and many investors have sworn off local stock markets after the recent crash.

London isn’t exactly known for pristine oversight, either. But no matter: the prospect of deeper links to China has Osborne very excited. “I want Britain to be connected to every part of this vast nation,” he said in his enthusiastic speech.

Britain has not been shy about its rapacious appetite for all things Chinese. It struck a deal to let renminbi trades be settled in London and became a founder member of the Asian Infrastructure Investment Bank. It will not let recent stock market volatility—or the Chinese government’s unconventional response—get in the way. But the UK is eager to forge ahead.

In fact, Osborne got downright sappy during his speech, sounding a bit like a lovestruck teenager:

Through the ups and downs, let’s stick together. Let’s stick together to grow our economies. Let’s stick together to make Britain China’s best partner in the West. Let’s stick together and create a golden decade for both of our countries. Britain and China: we’ll stick together.

Let’s see how long that love lasts once the two markets are linked.