China and the UK jointly announced last week the launch of a feasibility study into a stock exchange connect between Shanghai and London, in an effort to strengthen cooperation between the two nations' capital markets.

Sean Tuffy, head of regulatory intelligence at Brown Brothers Harriman in Dublin, was quoted by a Financial Times report as saying that the biggest obstacle for the scheme would be the time difference between the UK and China, as it would necessitate late-night trading, and would require banks to remain open for trading and settlement.

But late-night trading should not be a big issue for Chinese investors, as the trading period in the London Stock Exchange (LSE) would be from around 3 pm to midnight in China, which is not too late.

Furthermore, domestic banks could open a special channel for late-night trading, similar to the international banks that trade around the globe.

With the feasibility study being implemented, it is very likely that technical difficulties relating to the time difference will be solved in the near future.

There are also concerns regarding risks of capital flight, and potential hazards in China's financial opening-up. Some have also raised the question of whether the stock connect between Shanghai and London might compete with China's Qualified Foreign Institutional Investor (QFII) scheme. These concerns are overstated.

First, it is true that the stock connect will provide an opportunity for Chinese investors who prefer long-term investment to invest in the LSE, whose institutional investors share the same preference. But UK-based international investors will also be able to invest in blue chip stocks in the Chinese market via the stock connect scheme. As a result, the overall situation will be complementary between the two markets.

Second, in terms of potential hazards in China's financial opening-up, it is safe to say that the potential risks on the macro level are under control, as China's opening-up of its finance sector has been limited so far. Moreover, as yuan internationalization and the loosening of capital controls have been moving forward at a steady pace for years, the London-Shanghai stock connect in the foreseeable future would be a natural continuation of this process.

Third, considering the potential competition for investment between the Shanghai-London Stock Connect and QFII, we should note that QFII is only for institutional investors while a stock connect is open to both retail and institutional investors. Also, the stock connect would allow for two-way investment, while China's QFII is only for foreign institutional investors to invest in China. The stock connect would open up a new channel for overseas investment into China and although the two channels of investment may overlap to some degree, one would not replace the other.

However, there are some issues that Chinese investors will need to be cautious about regarding their trading habits in the UK. In a sophisticated stock market like the LSE, which is dominated by institutional investors rather than retail investors, it would not be advisable for Chinese investors to trade frequently on the basis of short-term price differences as they do in the A-share market, because the risks and costs will be higher.

Chinese retail investors should also be given some education about investing in the LSE with regard to trading rules, such as whether the exchange imposes daily price limits, or whether there is a circuit breaker mechanism. It would be best to give Chinese investors enough regulatory knowledge before they start investing via the new link.

The article was compiled by Global Times reporter Wang Wei based on interviews with Dong Dengxin, director of the Finance and Securities Institute at the Wuhan University of Science and Technology, and Yang Delong, chief strategist at China Southern Asset Management Co. bizopinion@globaltimes.com.cn