Long criticized for pricing inefficiency due to lacking two-way market movements, foreign financiers finally have the ability to short China A-shares after completing securities lending transactions for the first time ever.
UBS, Citi and Standard Chartered all issued statement claiming they had successfully executed securities lending transactions onshore following the relaxation of rules by the China Securities Regulatory Commission (CSRC) last month for Qualified Foreign Institutional Investors (QFII) – a scheme allowing foreign firms to invest in yuan-denominated assets based on a limited quota.
«Allowing institutional investors to access the onshore securities lending and borrowing market thus facilitating low-net investment strategies is a major development and will support the growth and diversification of investment strategies,» said Tim Wannenmacher, APAC head of financing and co-head of distribution at UBS which also followed up securities lending with short selling transactions.
«The latest regulatory relaxations offer more investment instruments to QFII, among which the stock borrowing and lending businesses have always been the most attractive ones that are frequently inquired by many overseas institutional investors,» added Rick Hu, Standard Chartered China’s head of securities services.
Discovering Prices
Although the latest move will better level the playing field between foreign entrants and local financial institutions, there are still challenges ahead to enable more effective price discovery and market efficiency.
Commonly cited issues include the lack of available stocks to borrow due to active institutional trading and borrowing costs – 8 percent for mainland-listed stocks, according to a «Reuters» report, around 8-fold of Hong Kong’s 0.9 to 1.2 percent – which has led to limited shorting activities.
As of June this year, less than $4 billion of shares were lent for shorting in Shanghai and Shenzhen or 0.044 percent of their total market capitalizations of $8.9 trillion. This compares to shorting ratios of around 2.4 percent in the U.S. and 1.5 percent in Japan, according to IHS Markit data.
More Tools, More Flows
China’s ongoing reforms are already seeing returns. Relaxation for securities lending and borrowing has boosted outstanding transactions to more than $18 billion while the total market value of A-shares held by QFIIs reached 1,974 billion yuan ($302.5 billion).
«Following the launch of Shanghai/Shenzhen-Hong Kong Stock Connect and the inclusion of A-shares in three major international indices, this latest relaxation of QFII rules will further boost the inflow of foreign capital,» said Tommie Fang, head of China global markets and QFII representative at UBS.
«We have seen a significant new wave of QFII applicants in recent months,» added Bryan Murphy, global head of intermediaries client coverage at Citi’s securities services unit. «Global investors are looking to take advantage of the new financial instruments available to them, expand their network inside China and reduce counter-party and concentration risk.»
