Last week, the Singapore Exchange (SGX) announced a link-up with the Bank of China to explore opportunities to handle more China-themed products. It was the latest in a long series of initiatives in which both Singapore and Hong Kong have developed their credentials as financial gateways within Asia.
In recent years, Singapore has introduced futures products that relate to markets for which it seeks to acts as a gatekeeper. In China, SGX offers China A 50 futures, and for India, it offers Nifty futures. Those products have thrived. They not only compete with other similar products in home domestic markets but trade in greater volume.
In the future, as the region’s markets become more sophisticated, it is far from certain that the continent will still need gateways forever, be it Singapore for Southeast Asia and India, or Hong Kong for China.
Today though, the role of the gateway still has its uses.
“If you could freely buy and sell certain currencies, access the market easily without registration, cumbersome disclosures, ID systems and be allowed to own companies, you would see more people going to those underlying markets directly,” says Greg Lee head of Asian autobahn equity at Deutsche Bank. “I am sure nobody would go through the other (gateway) markets.”
For retail investors, who can open a laptop and trade the world in diverse markets, gateways are desirable, due to the difficulties of trading those markets for non-institutions. However, for institutional investors, options are widening.
“Investors have obtained a lot of their China share exposure via Hong Kong-listed H shares. Now more and more investors are getting direct access,” says Andrew Freyre-Sanders, head of equity execution services at CIMB Securities. “One could impute that for institutional investor ownership if all Qualified Foreign Institutional Investor (QFII) was fully vested may still only be 1%-2% of the Chinese market directly, so it has got to be one of the biggest underweight holdings. If you are opening up China as a whole over the next five to ten years to direct investment, Hong Kong could be a big loser if people do by-pass Hong Kong.”
However institutions do have to be physically based somewhere. In that sense, a gateway can also take the job of being more user-friendly for outsiders than, say, Mumbai, Jakarta or Beijing.
“Realistically to be able to trade India, Singapore is just a better place to be based for an international broker,” says Barnaby Nelson, head of client development, banks, broker-dealers and corporate issuers, BNP Paribas Security Services. “The regulatory capital requirements are different, everything is different and it therefore does make it easier to be based there, that is why we see a lot of people based in Singapore. You have the SGX offering the efficiency of their risk management, the way that they manage margin calls, what the MAS do in terms of the cost of capital of trading in Singapore, the capital requirements of trading in Singapore, the market infrastructure. That is for me what constitutes a gateway.”
Commentators have been calling the imminent end to needing Asian gateways for several years, but both Singapore and Hong Kong are still here and making money from the concept. That said, whilst it may take ten more years, in Asia that the level of sophistication in our exchanges and the level of internationalisation is not getting narrower. It is improving.
In addition, for the most part regional cities are becoming more liveable for foreigners in the finance industry, (with some notable exceptions). In the future, Asian markets may well be able to provide sufficiently broad and deep products for traders just to go directly, at which point gateway cities will need to find a fresh role.
*The above comments were made in an Asia Clearing Council roundtable held in Hong Kong in September 2013. More from that roundtable appears in the Q3 edition of the Trade Asia.