Big investment banks are salivating over the prospect of China's mainland securities market, with everyone expecting it to become one of the world's largest in a few years. That has everyone from London to New York either touting their ability at getting their hands on some renminbi for their corporate clients, to singing the praises of Chinese fixed income. On Sunday, a Morgan Stanley executive said the company was hiring dozens of new equity analysts to help sell China's A-shares market since it opened to foreigners this year.
Investors with access to Hong Kong-based brokerages are now able to buy shares of companies listed on the Shanghai Stock Exchange.
"It changes the scale of what you can do in China in terms of putting capital to work," Gokul Laroia, co-chief executive of Morgan Stanley Asia Pacific told the South China Morning Post on Sunday. "With these companies little is known about their management teams, or about their business models," Laroia was quoted saying. "We are investing in research, investing in corporate access to be in a position to offer great content to our clients and come up with ideas."
Like most foreign investment banks, Morgan Stanley is based in Hong Kong and has a research team looking at 100 of mainland listed stocks listed on the Shenzhen and Shanghai exchanges. Last year, broker dealers were able to gain access to the mainland, or A-shares market through the Shanghai-Hong Kong Stock Connect, known as the "through train." Shenzhen is going to do the same this year. The through-train makes it possible for foreigners to invest directly in mainland China shares, within a quota limit, of course. These shares were off limits to investors until recently. U.S.funds were primarily invested in China companies listed in Hong Kong or on the NYSE. But not all of China's companies are listed in Hong Kong. So the stock connect system vastly expands the universe of tradable equity to roughly $3.5 trillion.
The market is nascent for institutional investors, which do not yet have a foothold in the A-shares market. Everyone basically suspects that market to expand quickly over the next few years. Laroia told the Hong Kong-based daily that the "through-train" could turn the mainly retail driven A-share markets into one that attracts institutional investors from U.S. and Europe.
Last year, China opened its domestic debt market to foreigners under a quota system. Now Luxembourg-based funds are attracting institutional money that is buying into a $4 trillion debt market that includes corporate bonds and money market funds. It's a whole new world. Many of these assets are not followed by western analysts. And bond investors are limited to larger qualified institutional investors with at least $1 million to put down on debt that has no traditional credit ratings by the big three. For some firms, this is very much a leap of faith.
But one thing is for certain, the slow internationalization of China's security market is becoming big business for Western banks. HSBC is one of the largest dealers in renminbi, partnering with corporate accounts that do business in China. Another U.K. firm, the Ashmore Group, was one of the first to have access to the Chinese bond market. It spends a lot of time touting the benefits of a debt market that will one day rival U.S. Treasurys in size and liquidity. And now Morgan Stanley is trying to position itself as a go-to source for mainland Chinese equities for its broker dealer clients in the U.S.
"This is all part of China's policy to open up its capital account, though full opening is still many years off yet. There are going to be restrictions for foreigners," says Alex Wolf, an economist with Standard Life Investments in the Edinburgh. "Regardless of restrictions, it’s a massive market already and it is going to get bigger."
For the riff-raff China gambler out there, there is the Deutsche Bank X-Trackers CSI 300 China (ASHR), an exchange traded fund that invests in Shanghai listed equities.
