Stock, Bond Connects switching costs could be high, warns Standard Chartered
South China Morning Post Jun 29, 2017
China may well be opening up its capital markets through a series of investment channels to buy mainland stocks and bonds, but a new report from Standard Chartered suggests some existing overseas investors are wary of using the new mechanisms in the early stages with cost proving a considerable hurdle.
According to Barnaby Nelson, Greater China and North Asia head at Standard Chartered Bank, 30.8 per cent of investors who are already invested in China say they are likely to continue using the QFII and RQFII channels already in place for future investments while 22.3 per cent will use the Stock Connect trading links.
With the introduction of Shenzhen Connect, 61.1 per cent of respondents said they will keep their investment activity in Chinese A-shares and 38.9 per cent said they will increase their activity, while 27.4 per cent expected to use the Bond Connect when it is available.
Nelson said legal, compliance, operational, and management costs are likely to be incurred on investors who already own Chinese bonds, because they would have to reduce their holdings to zero and then re-buy those positions using the new channels.
The users of the Stock Connect programmes have to stick to a daily quota, and consequently when that buying limit is reached, they will be then be forced to turn to QFII and RQFII mechanisms to add more investments if they require, Nelson said.
Just because you are now allowed to access new schemes, it doesn’t mean people will use them. People will not migrate away from the old QFII, schemes unless there is a easy way to do so
The Qualified Foreign Institutional Investor program (QFII), launched a decade ago, was one of China’s first efforts to liberalise cross-border flows and aimed at internationalising the yuan.
Users are allowed to buy domestic securities under a quota system, with the application period taking up 3 to 6 months.
QFII uses foreign currency to buy securities while the modified Renminbi QFII (RQFII) version uses renmibi.
“Just because you are now allowed to access new schemes, it doesn’t mean people will use them,” Nelson said. “People will not migrate away from the old QFII, schemes unless there is a easy way to do so.”
Meanwhile the Hong Kong-Shenzhen Stock Connect has been in operation for six months, the second mutual access scheme allowing foreigners to buy mainland shares, after the Hong Kong-Shanghai Stock Connect was put in place since 2014.
The upcoming Bond Connect, a programme that will allow foreigners to buy onshore debt, is expected to be launched on July 1, to mark the 20th anniversary of the handover of Hong Kong.
Hong Kong Exchanges and Clearing Chief Executive Charles Li Xiaojia speaks during a news conference introducing Shenzhen-Hong Kong Stock Connect last August 16, 2016. Photo: Reuters
Nelson said that in coming months, investors who do not already own Chinese investments are likely to choose the newer investment channels such as the Stock and Bond Connect schemes, because they fall under the more familiar Hong Kong jurisdiction, or the China Interbank Bond Market (CIBM)
direct as it does not require a quota.
Just over 40 per cent of Standard Chartered Bank’s respondents to the survey – who do not already own Chinese investments – said they will consider using the Connect programme for their new holdings and 33.7 per cent said they plan to use the CIBM direct.
But for foreign investors who already own Chinese investments, they are likely to continue using the old QFII, and RQFII mechanisms otherwise they would have to reduce holdings to zero and then re-buy those positions through the new channels, which could be a clumsy, and expensive process, Nelson said.
Almost half the market is using less than half their QFII quota but investors are likely to keep the spare capacity than handing them back.
Major investors, however, said Nelson, are likely to become more diversified using the Stock and Bond Connects, and the CIBM direct while keeping their use of their QFII and RQFII.
The survey, conducted in March, involved 900 respondents including traders, portfolio managers, CEOs and head of operations across the US, UK, Hong Kong, Singapore and Japan.