(Bloomberg) -- 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 U.K. 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 that 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 U.K. 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 U.K. leaves the European Union this month, and with a decision looming on whether to allow Chinese tech giant Huawei Technologies Co. 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 ruling Conservative lawmaker 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 spokesman Geng Shuang said he’s “not aware of the specifics” of the stock exchange case. “I would just like to stress that we hope the U.K. 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 cooperation 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 U.K. 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 U.K.-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 U.K. 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 dialog to defuse tensions -- though even these interventions triggered an angry response from Beijing.
Read a Quicktake on the U.K.-China market link plan
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 U.K. interests.”
A long-delayed decision on whether Huawei access to the U.K.’s so-called 5G communications networks has the potential to fuel further tensions if Johnson succumbs to U.S. pressure to ban the Chinese company on security grounds.
The Financial Times reported last week that President Donald Trump’s administration has stepped up the pressure to block Huawei, citing an interview with U.S. National Security Advisor Robert O’Brien. The U.S. has warned allies that the Chinese government could gain a backdoor to communications networks, and has threatened to withdraw intelligence sharing.
The decision is fraught with risk, and Johnson has hinted the U.K. 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 non-core elements of the network.
“The hidden state subsidies to firms like Huawei, which are also said to cooperate 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. “Cooperation is important to both China and the U.K. but that has to be based on reality.”
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 program launched last year, while no U.K. 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 last month’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 U.S. 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 assistance from Amy Li, April Ma, Viren Vaghela, Alex Morales, Dandan Li and Iain Marlow.
To contact Bloomberg News staff for this story: Evelyn Yu in Shanghai at firstname.lastname@example.org;Steven Yang in Beijing at email@example.com;Heng Xie in Beijing at firstname.lastname@example.org
To contact the editors responsible for this story: Candice Zachariahs at email@example.com, Stuart Biggs, Flavia Krause-Jackson
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