Terry Minkey and Matt Kiraly of HSBC reflect on the recent developments in the Chinese funds industry that continue to simplify the process of accessing the China markets for foreign institutions and investors.
How has the China securities market developed in recent times?
Matt Kiraly (MK) – The regulators in China have continued to make the onshore market more accessible to foreign investors, and over the past few years there has been a consistent relaxation to the barriers to entry. Any foreign investor with active exposure to China or looking to build exposure in the medium- to long-term should explore the benefits of these changes; whether that means setting up directly onshore or using one of the programmes launched offshore to help access the market.
Have these changes served to make accessing China more appealing for a wider range of foreign investors?
Terry Minkey (TM) – Despite the macro-political headwinds and slow-down in growth, China continues to offer foreign investors access to one of the largest and fastest-growing economies in the world. The China market has without a doubt grown too big to ignore for many investors and they're deepening their understanding of the opportunities in the world’s second largest equity market by market cap; the world’s second largest convertible bond market; and the world’s third largest bond market. These markets, though, are largely funded at this time by domestic investors. The relaxation of the foreign access restrictions -- at the same time making hedging easier as well -- is really designed to address this imbalance and of course this is further helped by the MSCI inclusions
More recently – In June 2019 -- China launched the STAR market which is a tech-focused board in Shanghai. This new board is something which foreign investors are very interested to participate in and can currently access the IPOs only through QFII or RQFII.
Matt Kiraly (MK) – It should also be noted, that despite the launch of the programmes – whether focused on fixed income or equities -- foreign participation is still, on a relative basis, low when compared with the overall market participation. For managers, there's a tremendous upside in the market as it continues to open and become more accessible.
What are some of the key difference between China’s different access channels?
Matt Kiraly (MK) – One of the trends that has been very noticeable this year is the increase of Hedge Funds in applying directly for QFII or RQFII; particularly as the regulators have relaxed the entry requirements in these programmes. This is still a relatively new area for the regulators in China; they are definitely encouraging foreign participation and I think this is a positive sign given these programmes have historically had very few hedge funds participants. As a market leader in this space, HSBC has seen a significant amount of interest from clients globally looking to understand the application requirements and operational intricacies of trading in the onshore market. This trend has been prevalent across managers based in the US, Europe and in Asia.
“China continues to offer foreign investors access to one of the largest and fastest-growing economies in the world.”
What queries do you clients have about accessing such programmes?
Terry Minkey (TM) – Clients all have queries about access and the multiple access channels and products available, and there is also the application process for QFII/RQFII to go through when accessing these markets. While this process has been simplified, there is still one to go through and it's incredibly important that clients receive guidance around these channels, their options, and around completing the application so that it is successful.
As a market- leader in the Chinese market, HSBC is well-positioned to help clients through this process and help them with the decision-making around the channels they ultimately decide to use. There really is an important consultancy element to accessing the China markets.
What's next for the local Chinese market?
Matt Kiraly (MK) – The development of the stock borrowing and lending market onshore will be in the next phase in the development of the onshore market. We expect more communication on this topic imminently. It is also likely that we will see continued liberalisation and amalgamation of the QFII and RQFII programmes which will make it easier for various managers of all strategies and sizes to get access to the market directly.
It should also be noted that many foreign managers are looking to access more products via the QFII and RQFII programmes. I believe expansion of commodity futures and other types of futures will occur in due course. Finally, another key trend is managers setting up onshore and distributing local products. We anticipate that this will continue and that the Chinese regulators will further streamline the process for foreign managers.
Terry Minkey (TM) – I would say that HSBC is uniquely placed to help. We have a local Chinese broker JV -- HSBC Qianhai Securities – a local Chinese custodian, as well as a global prime brokerage franchise which is there to support the alternatives industry, and more; we have people on the ground and in the hubs with significant knowledge of the market. As such, we can bring everything together and collaborate highly effectively to deliver the Chinese markets to our clients. I think there are very few market participants out there who are able to do this in such an effective way.
Matt Kiraly (MK) – When clients are looking to participate in China, they are going to require a partner with both a strong onshore and offshore presence who can provide them with a detailed understanding of the options available to access the market. Given HSBC’s long-term presence in China, our expertise onshore, and our significant market share across the various programs, we are well-positioned to help our clients globally.