HSBC still upbeat on China despite MSCI snub

Despite expectations that MSCI would include China in its key benchmarks this year being dashed, HSBC says there is still much to be hopeful about.

MSCI’s decision not to include China’s equities in its global benchmark indexes has not dampened optimism surrounding the opening up of the mainland markets.

Investors and market infrastructure providers alike have spent three years anticipating the inclusion of China’s A-shares in the MSCI indices. Expectations were high this year after MSCI announced it was working closely with Chinese regulators.

Despite this blow, the opening up of China’s market continues to go from strength to strength, with rumours of Stock Connect extensions and last week’s announcement that China will grant the US a 250 billion yuan quota under its Renminbi Qualified Foreign Institutional Investor (RQFII) scheme.

‎”This has been an exciting first half of the year,” said Florence Lee, head of China sales and business development, HSBC Securities Services. “We have seen a lot of significant changes despite the MSCI announcement.

“The MSCI announcement still leaves leeway that they can do something off the cycle – even though it is usually every year around this time.”

Lee added that it is now down to China to look at its market and continue to bring it up to the international standards sought by MSCI.

“The Chinese market would like to internationalise their currency and to achieve that the index inclusion would be part of that evolution, making RMB a more popular investment currency.

China can do more and be better and faster to open up the market and reach those standards. If you want to integrate into the international market it’s something you have to do, if you do it in your own Chinese way it might not work.”

The RFQII has now reached 17 markets, including the recent US announcement, and investor demand is still on the rise. Meanwhile Stock Connect could expand to include a Shenzhen-Hong Kong link later this year.

Along with Stock Connect and Qualified Investor schemes, the China Interbank Bond Market (CIBM) is also beginning to open up. This will be of major international significance with the CIMB being the third biggest in the world behind the US and Japan. Only 1.4% of that activity is from foreign investors though.

HSBC is pioneering the opening up of this market and has facilitated the first overseas financial institution’s access to CIBM, enabling Insight Investment to register with Chinese regulators.

HSBC will act as a settlement agent bank and custodian for the company and is the first bank to facilitate such access since China announced in February that it would further open up the CIBM to overseas financial institutions under a registration process.

“The CIBM is the next big thing coming in over the next 12 months,” said Lee. “In the US and Europe you have a lot of liability driven assets and a more mature pension systems and insurance assets in the books. Institutional investors in the US and Europe are more interested in the Chinese fixed income market than equities.

“Insight has already shown us that they have a strong interest and want to go through this direct route. In the past you had to go through three regulators, submitting about 12-15 documents with each, which would take around nine to 12 months.”‎

Under the new scheme, investors are able to go through one bond agent and register with one regulator to access the $7 trillion interbank Chinese bond market.