[ M A R K E T
R E V I E W
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C H I N A ]
H
aving been denied admittance to the MSCI Emerging
Markets Index for three years straight, it was con-
firmed in June 2017 that Chinese A-Shares would
finally be incorporated into the benchmark, enabling global pas-
sive investors to gain exposure to an equity market second only
in size to the US. More good news followed ni ne months later
when Bloomberg Barclays gave the nod to Chinese bonds being
allowed into its Global Aggregate Index, a huge boost for the
local debt market, estimated to be in the region of $9-$11 trillion.
“When you look at the size of the markets, it is completely
logical for the major index firms to include them. In some ways,
it could be seen to be a surprise that it had not happened earlier.
In reality, it is the internationalisation of the Chinese markets
and the improved access routes for offshore investors that have
created options which are more aligned with global standards
allowing index managers to take these decisions,” says Gary
O’Brien, regional head of custody product, APAC, at BNP Pari-
bas Securities Services.
MSCI takes stock
Chinese regulators have introduced a series of equity market re-
forms, expanding the number of gateways for foreigners to buy
domestic securities beyond QFII (Qualified Foreign Institutional
Investor) and RQFII (Renminbi Qualified Foreign Institutional
Investor) schemes. Stock Connect created a linkage between the
exchanges in Hong Kong, Shanghai and Shenzhen, giving inves-
tors easier access to each other’s respective capital markets, with
more than 2000 equities now eligible for trading.
Regulators recently announced an increase to the daily trading
quotas on Stock Connect, and it is expected exchange traded
funds (ETFs) and primary issuances will be added to the im-
pending “Connect” adaptations within the next 18 to 24 months.
Furthermore, according to reports, the UK’s London Stock
Exchange is planning to go live with a London-Shanghai Stock
Connect programme this year, despite concerns over time-zone
“One of the most commonly asked questions
we are fielding from institutions is ‘how
quickly can we get authorised in China?’”
MARGARET HARWOOD-JONES, GLOBAL HEAD OF SECURITIES
SERVICES, TRANSACTION BANKING, STANDARD CHARTERED
differences, divergent settlement cycles, the use of renminbi
(RMB) in settlements and Chinese short-selling restrictions.
These reforms have been a driving factor behind MSCI’s inclu-
sion of A-Shares, as has the government’s loosening of various
restrictions ushered in following the equity market volatility in
2015 and pressure on the RMB. PBOC, for example, recently no-
tified financial institutions that matching outflows with inflows
when processing cross-border RMB payments was no longer
needed, while the frequency of A-Share trading suspensions
has fallen too, although it still remains high relative to other
markets.
Bond market reform takes shape
The size of China’s bond market – eclipsed only by the US and
Japan – has not translated into strong investor flows, with for-
26
Global Custodian
Summer 2018
eign ownership of outstanding govern-
ment debt accounting for just 2.4% of the
total, according to a Standard Chartered
white paper, versus 38% in India, the
country’s largest regional competitor. The
government has attempted to redress this
anomaly, by broadening foreign investor
access beyond the conventional QFII and
RQFII routes by introducing CIBM Direct
and Bond Connect.
Both CIBM Direct and Bond Connect
let investors trade Chinese bonds without
being subject to quotas in contrast to
QFII and RQFII. However, CIBM Direct
is fully onshore and requires investors to
appoint a local custodian, whereas Bond
Connect is offshore, meaning institu-
tions can work with Hong Kong-based
providers. “Market reforms played a big
part in persuading Bloomberg Barclays
to include Chinese bonds on its index,”
said Florence Lee, head of China sales
and business development, EMEA, HSBC
Securities Services.
Bracing for impact
MSCI said it would begin to incorporate
234 China A Large Cap stocks from June
2018 into its Emerging Markets Index,
accounting for 0.78% of the flagship in-
dex, and approximately 5% of the overall
number of A-Shares in existence. This
threshold, said MSCI, took into account
the continued ownership limits in China,
adding that further reforms needed to
be enacted before full inclusion could be
justified.
“MSCI has made it clear that the 0.78%
weighting is only an initial weighting, and
that a full weighting will materialise once
China makes improvements to its market
access channels, among other reforms,”
highlighted Lee. Despite only having a
partial inclusion, experts are predicting
initial flows – driven by passive manag-
ers - into A-Shares could reach anywhere
between $15 billion and $17.5 billion.
O’Brien of BNP Paribas says he has seen
interest from passive and active manag-
ers planning to increase their A-Share
exposures.
Margaret Harwood-Jones, global head
of securities services, transaction banking
at Standard Chartered, agrees. “One of the
most commonly asked questions we are
fielding from institutions is ‘how quickly
can we get authorised in China?’. Since
index inclusion was announced, there
has been a very noticeable increase in the