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Country Profile: China's securities finance market

09 March 2017

Although Shanghai and Shenzhen have widened the availability of stocks, securities lending is at a very early stage in China

Mainland China’s two stock exchanges, Shanghai and Shenzhen, widened the list of stocks available for securities borrowing and lending (SBL) at the end of 2016. Over 70 new securities were opened up to lending, bringing the total number across the two bourses to 950.

Both bourses now link to Hong Kong through separate Stock Connect initiatives, creating an approved solution for lenders and borrowers of Chinese A-shares. Even so, SBL activity remains very subdued and it is considered uneconomic to trade.

"Securities lending is at a very early stage in China but as the market matures I am sure that it will become much more interesting," says Rakesh Patel, head of equities, Asia-Pacific, HSBC.

Last year’s decision by MSCI to keep mainland-listed shares out of its key emerging markets index was a blow to China’s regulators. Another review is expected in June and a green light would be viewed by many as a positive step for SBL activity.

However, MSCI’s snub proved to be an opportunity for certain firms. In February, BBH analysts noted an uptick in demand to borrow Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) following the index provider’s decision. ASHR tracks the CSI 300 Index and offers direct access to Chinese A-Shares. BBHs expect ETFs in general to remain in demand, specifically ASHR.

 Hong Kong-listed Chinese property stocks, which proved too hot for short sellers in early 2016, saw a jump in shorting activity mid-2016 as high investor demand drove prime urban real estate prices higher.

There’s evidence to suggest margin financing and securities lending balances are continuing to grow domestically; balances exceeded RMB1.1trn in 2015, according to KPMG statistics. However, regulations do not currently permit offshore participants to engage directly.

In addition, extreme stock market volatility two years ago means the Chinese Securities Regulatory Commission’s (CSRC) focus has shifted away from continuing liberalisation of markets towards stabilisation. This approach has extended to securities finance.

 "China will want to move at its own pace when liberalising capital markets – they will not be forced into running at anyone else’s pace," says HSBC’s Patel. " They will have a very thoughtful and systematic approach to securities lending alongside the general evolution of the capital markets. It will take time but I think there is a growing appreciation of what securities lending can offer the market – liquidity provision, encouraging domestic flows and encouraging multi-asset strategies.

"There is no doubt that China will be one of the biggest lending markets globally. I am sure about that. But it will not happen in the short term."

Davin Cheung, global funding and financing sales, APAC, Clearstream Banking says that the prospect of tri-party in China is "quite exciting", given it is the third biggest bond market in the world and there are thriving OTC and exchange markets for cash and bond repos, plus a growing stock loan market.

 "The market for the moment is quite domestic, but we recently opened a link into China (CIBM) whereby our international clients could basically buy-and-hold those China bonds and safekeep them in Clearstream. We have initiatives and MOUs with multiple infrastructures such as CSDs to share ideas in terms of, for example, how to mobilise and internationalise those assets and to further create collateral value from these assets for market players."

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