(Pictured: David Bone)
Citi has introduced a service for super funds and managers to help them capitalize on the launch of the Shanghai-Hong Kong Stock Connect program, which will enable foreign investors to buy China ‘A’ shares without a QFII quota and for Chinese investors to more easily access foreign markets.
The Stock Connect program, which takes effect on October 13, is a major reform for cross-border investing in the region but it still has some restrictions and inconveniences which Citi is looking to alleviate.
Citi is linking its markets (broking) and securities servicing (custody) businesses for a third-party clearing capability which means that Australian investors, for instance, will not have to engage a separate Hong Kong-registered broker nor transfer the funding or stock for the trade to a counterparty prior to the transaction taking place.
David Bone, who heads up global custody product for Citi, based in Hong Kong, spoke to clients in Australia about the new service last week. He said Citi was currently building out its capability on the trading side for foreign investors and putting in place baseline developments for custody clients, such as accounts structures, FX support and liquidity management.
The restrictions imposed by the Chinese authorities are designed to discourage “hot money”, Bone said. “The regulators are trying to ensure that they attract long-term buy-and-hold investors.”
In effect, Stock Connect introduces a T+zero trade system, rather than Australia’s T+3, because the stock for sale needs to be deposited with the Hong Kong broker prior to be sold. This also means naked short selling is not possible.
Under Citi’s service, the client’s money remains with Citi and is transferred to a separate Citi broking account prior to the trade, which also reduces potential counterparty risk.
Martin Carpenter, who heads up securities servicing in Australia, said the service would be available to both Citi’s existing clients and also as a standalone offering.
Bone said that some investors found the existing QFII process, which involves applying for a licence to buy a certain value of China ‘A’ shares, too arduous. Only a couple of Australian managers are known to have a QFII licence – the rest get their Chinese stock through third-party licence holders, such as an investment bank.
Bone said the mutual market access program had created a lot of interest with Citi clients in North America, Europe and Asia. “It’s the next leg in the journey to take us to the end game,” he said, which would eventually lead to open access to the Chinese market and perhaps the floating of the RMB.
Stock Connect will allow trading in the top 180 (large caps) and next 380 (small-mid caps) Shanghai listed ‘A’ shares, as well as Hong Kong-listed and Shanghai-listed ‘H’ shares. Bone said they accounted for about 90 per cent of the entire market’s capitalization and about 80 per cent of daily turnover.
One of the reasons that the Chinese market is more volatile than most western markets is that it has, to date, been dominated by retail investors, many of whom operate more as speculators than long-term holders.
By linking the Shanghai and Hong Kong markets more closely under Stock Connect, the system will also help convergence of prices between the two markets and reduce arbitrage.