White Collar

MSCI verdict to defer adding A-shares may be a boon for Hong Kong

PUBLISHED : Monday, 15 June, 2015, 10:41am
UPDATED : Monday, 15 June, 2015, 6:16pm

MSCI’s decision last week not to include China’s A-shares in its widely-followed emerging markets index disappointed many mainland Chinese officials and punters. But why should Hong Kong feel bad about it as well?

In fact, many brokers believe the MSCI’s decision may help Hong Kong bargain with authorities in mainland China to open up their markets further.

MSCI said China needed to improve access to its capital markets before it could consider adding A-shares in Shanghai and Shenzhen to its global benchmark indices. An estimated US$1.7 trillion tracks the index and inclusion of A-shares are expected to pump some US$400 billion into the A-share market.

China’s capital market is not yet fully open and foreign funds could only invest through the two qualified foreign institutional investors (QFII) scheme, or via the stock market connect linking Hong Kong with Shanghai. For the mainland to meet the requirements of MSCI, there are several ways to do so and almost all would ultimately benefit Hong Kong.

First, it could expand the Shanghai and Hong Kong stock connect by removing the daily or total quota. The scheme now only allows international investors to invest up to 13 billion yuan a day or 300 billion yuan in total. The other is to get the Hong Kong and Shenzhen stock connect up and running as soon as possible.

If Beijing opts for both, Hong Kong would gain as international investors under both through train schemes would need to tap Hong Kong brokers to buy the A-shares.

If Beijing chooses to expand the QFII schemes, then it is not going to help Hong Kong much as the investment banks from the US or other parts of the world would directly invest in the A-shares without having to go through Hong Kong.

The process of bargaining for A-shares’ inclusion in the MSCI is an opportunity for Hong Kong to underscore its role as the indispensable bridge for international investors to China.

Will that be a bad thing for Hong Kong listed H-shares? The answer is yes and no. When international investors invest in A-shares directly, they do not need H-shares to gain exposure to the mainland market.

But it should be noted that many A-shares are trading at a premium to H-shares. More trading in A-shares would provide arbitrage opportunities for H-shares. This would then bolster turnover in the Hong Kong market as well, another plus for the city.

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