China Pacific Insurance has completed London’s second largest stock listing of the year, boosting a flagship programme to connect the biggest equity markets in Europe and China.

The insurer issued $1.8bn in global depositary receipts in London, backed by shares listed in Shanghai, as part of a “stock connect” programme that links the two exchanges. Full trading in the GDRs began on Monday.

China Pacific, which said it would use the proceeds of the offering to expand its overseas operations and to invest in foreign businesses, has become the second company to use the link since its launch in June last year — the culmination of a project unveiled five years ago by China and the UK. 

The two governments agreed then to connect their primary domestic bourses, so companies that are listed in one venue can raise capital on the other through depositary receipts, which are exchangeable for shares after 120 days.

When the programme was devised, many Chinese companies were heading for New York rather than London. George Osborne, who was UK chancellor at the time, said Britain “can be China’s best partner in the west”. He said he wanted to see “UK firms raising funds from Chinese savers, and Chinese firms listing in London”.

Despite the exchanges’ efforts, only the broker Huatai Securities, based in Nanjing, had used the link before China Pacific. Fund managers said that was a reflection of low liquidity and better options elsewhere.

Nicholas McConway, head of thematic strategies at asset manager Amundi, noted that both of the two listings so far were available to international investors through Hong Kong — and Hong Kong’s own link with Shanghai — so “there’s no unique access” provided via the GDRs.

Trading has been sparse, too. About 50,000 Huatai GDRs have changed hands per month this year, down from about 5m per month after the launch last summer. That had created price discrepancies that traders had used to their benefit, Mr McConway added, by redeeming London-listed receipts and hoping to sell for a profit in Shanghai, where there was more liquidity.

A few Chinese companies are due to take part in the programme. Chinese group SDIC Power had intended to list GDRs in London last December but pulled its plan, blaming poor market conditions.

“London is a good timezone to attract investors in any location,” said Fiona Yang, a fund manager at Invesco, though she also cited thin liquidity as a problem. “When there are more stocks being listed, maybe gradually we will see more participation,” she said.

The backers of the programme think it could benefit from US-quoted Chinese companies coming under mounting regulatory pressure to delist. But the London-Shanghai link is also subject to the state of political relations between China and the UK: it was briefly halted earlier this year, according to officials, due to tensions over Hong Kong.

The Shanghai Stock Exchange said it would continue to support the opening up of business between the two cities. The LSE has said it sees Shanghai as the financial centre for China.

“We’re pleased with the way it’s progressing,” said Charlie Walker, head of equity primary markets for the London Stock Exchange. The nature of the project meant the number of listings would be low, he added, but the amount of capital raised would be large. “We’re not expecting 20 companies to use it in a short period of time.”

Bankers and lawyers working on deals say new listings have been suppressed by volatile market conditions. “The two that we’ve seen so far have been very big and have done well — the structure works and there is appetite for it,” said one banker who declined to be identified. 

What could make a difference were listings of companies that were not quoted in Hong Kong, said Mr McConway. “This could drive interest and help establish liquidity, which could provide a virtuous cycle for new listings.”

But the different make-up of the two markets is another barrier, analysts say. Shanghai’s two biggest companies, Alibaba and Tencent, are technology companies, of which London has few.

“London is not naturally the place that attracts many ‘new economy’ stocks,” said Haiyan Li, head of Greater China research at asset manager Carmignac, who contrasted it with the tech-heavy Nasdaq and New York Stock Exchange. “Hong Kong is fast becoming the most favoured back-up solution.”

Additional reporting by Tom Hale in Hong Kong

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