Canadian pension funds call for more short-selling avenues for China A shares

Managers at leading national pension funds say the inclusion of yuan-denominated A shares into MSCI indices has made China an attractive long-only market, but they are hoping for more avenues to short-sell equities so that they can also implement other hedge-fund like alternative strategies.

Amy Flikerski, senior portfolio manager for the C$350 billion CPP Investment Board (CPPIB), which invests pension funds for 20 million Canadians, said the addition of Chinese domestic shares to the MSCI Emerging Markets Index, MSCI China Index and MSCI All Country World Index, is significant and that this could also lead to more capital market opening in China.

Currently, the CPPIB has invested C$8 billion in Asia-Pacific, of which a quarter is in Chinese equities.

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However, she said that the A-share market still remains a long-only market.

“Shorting does exist [for A shares for offshore managers] but when the ability to short A shares can go beyond just the stock-index futures, quant market [can develop],” she said.

Some quant trading strategies, such as pair trading, is an alternative trading strategy that seeks to profit from matching a long position with a short position in a pair of highly correlated instruments.

While both the Shanghai and Shenzhen stock exchanges offer securities borrowing and lending services for their designated pools of permitted single stocks, foreign investors are currently not allowed to participate. They can however trade stock index futures, and take both long and short positions on the index.

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Mario Therrien, a senior vice-president for Caisse de depot et placement du Quebec, which manages the retirement savings of Quebecois and has C$298 billion under management, said after A shares are included in the MSCI indices, he expects the significant increase of fund flows into the A-share market will bring about more volatility.

“For our hedge fund strategies it has been a challenge [for the external fund managers that we mandate] to short sell stocks. So for these managers it is about how they capture this great security selection opportunity without taking too much risk,” he said.

Carl Huttenlocher, managing partner and chief investment officer for Myriad Asset Management, said the Shanghai and Shenzhen stock connect schemes have been a game changer for fund managers, as it gives them the ability to borrow A shares for shorting through the Hong Kong stock exchange which runs the mechanism designed for foreign investors to trade China-listed shares outside China.

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“With the MSCI A-share inclusion, you will see the borrowing pool increasing. The breadth of investment opportunity for the A-share market is improving,” he said.

For example, under the Shanghai stock connect, 384 securities listed on its bourse are eligible for short selling.

He expects that there will be an additional US$1-2 trillion inflows into Chinese equities and fixed income market over the next seven to eight years, in addition to the fund flows that will be invested into A shares as a result of the MSCI inclusion.

Some analysts expect that the MSCI inclusion of A shares in the Emerging Markets Index to trigger foreign inflows of up to US$400 billion in the next 10 years.