Looming access to Chinese financial assets and a cross-region digital makeover of market infrastructure were poised to open new opportunities for Asia-Pacific investors, according to BNP Paribas Securities Services APAC head of custody product, Gary O’Brien.
The Hong Kong-based O’Brien, in NZ last week on client visits, said the imminent inclusion of China A stocks in the MSCI Emerging Markets and All Country World Index series could see a “quadrupling of [foreign fund] flows into China” as investors rebalanced to the new benchmark weights.
He said the changes, due to begin a gradual phase-in process on June 1 this year, would initially affect investors exposed to passive funds benchmarked to the MSCI index.
“But it’s expected to open the way for active managers too as they see the [China A] market functioning properly,” O’Brien said.
MSCI is the first index provider to include China A shares – which are priced in Chinese currency and traded on the mainland – in global benchmarks. To date, most offshore investors have accessed China stocks via a restricted range of securities denominated in offshore currencies.
The China A shares update will start at a low level – representing about 0.73 per cent of the MSCI EM index – but could eventually reach almost 17 per cent of the benchmark, according to a 2017 report by Aon Hewitt.
“The potential magnitude of the A-Shares weight change could be unprecedented compared to any historical development in the MSCI EM Index,” the Aon report says.
China A shares included in the MSCI indices (starting with 222 companies) are traded under the ‘Stock Connect’ program that links mainland China and Hong Kong share markets. About 2,000 global investors have opened up Stock Connect accounts – a number that would likely double following the MSCI move, O’Brien said.
Doug Cameron, head of BNP Paribas NZ, said some NZ investors would have to update administrative arrangements following the MSCI index move.
“As many NZ institutional investors now own global securities directly under mandates rather than through unit trusts they will have to open accounts in China [if exposed to the MSCI index],” Cameron said.
O’Brien said while MSCI has led the way, other index providers including FTSE and JP Morgan would likely follow suit.
He said fixed income investors were also poised to gain greater access to Chinese debt assets under a program that mirrors Stock Connect. The ‘Bond Connect’ system, launched just nine months ago, allows offshore investors to buy certain China-domiciled – mostly bank – fixed income securities.
“We expect offshore flows to also quadruple once [Bond Connect securities] get included in the index next year,” O’Brien said.
Since launch, Bond Connect has attracted about 320 offshore institutional accounts that, he said, appear to be new investors rather than those transitioning from the existing, clunkier China investment regime.
But as well as freeing up offshore entry to financial markets, China was also relaxing rules that have previously restricted global fund managers’ access to Chinese investors, O’Brien said.
“For example, there is mutual recognition of funds between China and Hong Kong – and Singapore soon,” he said.
China’s financial market liberalisation was happening, too, against a backdrop of market infrastructure rebuilds across the Asis-Pacific region.
O’Brien said the raft of changes included market technology upgrades in Hong Kong, Singapore, Australia, New Zealand, Thailand and Indonesia.
The ASX, for instance, is scheduled to go live with its blockchain – or ‘distributed ledger technology’ – settlement solution in 2020. Meanwhile, both Hong Kong and Singapore are also exploring blockchain market infrastructure systems.
Despite the rash of blockchain announcements, he said “nothing has been industrialised yet”.
Meanwhile, one part of the NZ market back-office system – the Reserve Bank of NZ-owned NZClear – was also getting spruced up but not blockchained.
And stock markets across the region were shifting to shorter settlement times with talk of ‘T+1’ – or deals settled within one day of the initial transaction – or even ‘T+0’ on the table, O’Brien said.
In 2016 the NZX moved to ‘T+2’ from the long-standard ‘T+3’.
“This is a time of extraordinary change across Asia-Pacific,” he said. “Everybody has to focus on what pieces of those changes will affect them and how it may enhance their businesses.”