Session Summaries from the 2021 PASLA/RMA Update on Asian Securities Lending: Is Hong Kong Still Relevant as China's Gateway to the World?

The recent PASLA/RMA Update on Asian Securities Lending brought together leaders in the securities lending industry in the APAC region for two great days of panel discussions from industry leaders. Discussion topics included:

• Environmental, Social, and Governance
• The Future of Securities Lending in the Asia Pacific Region
• Fintech and Emerging Technologies
• The Hong Kong/China Relationship
• Developing Market Opportunities
• Key Figures in the Industry

Is Hong Kong Still Relevant as China’s Gateway to the World?

Moderator: Stuart Jones, Managing Director, Jefferies

Panelists: Sean Greaves, Managing Director, Head of Product Development, State Street; Joanne Lau, Vice President, Asia Securities Finance Sales & Trading, Jefferies

Hong Kong has a solid and tested legal framework as well as documentation that is familiar to global investors. These and other elements of familiarity make Hong Kong a primary route for investors.  The Hong Kong Exchange over the past year has been successful, with trading volumes four times that of the London Stock Exchange.

December 2020 marked the first time qualified foreign institutional investors (QFIIs) conducted short selling transactions in China’s mainland stock market. Now that the market is available for QFIIs, panelists believe their participation could help attract more funds and could allow China to open with Hong Kong as a channel. Applying for QFII status was a long and cumbersome process. Regulators clearly believed “institutionalizing” the market was crucial for global investors, making this a smart move, panelists believed. Panelists added there is interest from both supply and demand sides, including institutions that already have QFII access and those that use Stock Connect (a collaboration between the Hong Kong, Shanghai, and Shenzhen Stock Exchanges), which currently is very much linked with Hong Kong. An investor does not need to have QFII access to go through Hong Kong.

Hong Kong is still a popular destination for Chinese companies that want to raise U.S. dollars. Hong Kong exchange regulators work closely with China to access foreign money. Also, the Singapore Exchange recently announced it has partnered with Euroclear Bank to launch the Orchid bond structure in Singapore. Although both exchanges appear to be vying for the Chinese business, Hong Kong for now still holds the top spot. The float coming out of China up to February had been about $50 billion, mostly via a southbound flow, and much of that can be attributed to the Hong Kong Exchange’s massive spike in volumes.

There has been a strong push to promote Hong Kong on a global basis to bring access to capital to China.  Panelists expect this trend to continue. Driving this access to capital is a keen interest in initial public offerings (IPOs) and secondary listings in Hong Kong. More funds raised in 2020 were technology-focused than in previous years. Also, China, traditionally a very retail-driven market, seems determined to move more toward institutional. The liberalization of QFIIs, opening up participation in securities lending, will help diversify the lending base.

Repo and bond lending across global markets is an important component of the market’s structure—both are currently under review by the PBOC for QFIIs, but not available at present. Neither are available via the Bond Connect channel and repo is only currently for RMB clearing and participating banks.

There is hope the China market will head toward “familiar territory” for most market participants—that is, a generous style of repo contract and operational flow. There are ongoing discussions, and it would be advantageous to market participants to have a model that closely follows that of other markets.

Hedge funds, relatively new in mainland China, could become an important part of the overall ecosystem. A decade ago, there were few hedge funds in China, and those that did exist were usually large mutual funds that started hedge fund strategies. A few years ago, domestic hedge funds started appearing, and there are now platforms where hedge funds can raise capital from private investors. Big supply side investors are also increasingly diversifying into hedge funds, and the industry is expected to grow significantly in the next few years as larger institutional groups take on these investments.

Panelists ended the session with a discussion of transparency and oversight. “This is probably not something that people are going to be experiencing when they access China,” one speaker said. Understand that the rules of engagement and level of transparency will differ, although there may be more traditional sources of business that are reluctant to embrace that culture. With the ongoing innovations in China, transparency and strict regulations are necessary, but panelists believe participants will develop a level of confidence once clarity around regulations is achieved.