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
"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,
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
"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
"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."