Global banks scrap for share of expected China MSCI trading boom

Morgan Stanley is one of several major banks eyeing up a slice of an anticipated boom in Chinese share trading. (Reuters)

• Inclusion of China stocks in MSCI's emerging market index may lead to $60 billion of inflows in inital phase.
• Foreign ownership of stocks in China currently represents just over 2 percent of its nearly $9 trillion market capitalization.

HONG KONG: Western banks are scrambling to beef up research coverage of Chinese stocks as they look to cash in on the looming inclusion of mainland stocks in MSCI’s flagship emerging markets indexes, which is expected to trigger a surge of foreign inflows.
Banks are hoping for a boost to regional trading revenues with the addition of 234 Chinese large cap stocks by MSCI, the US index publisher.
UBS expects the inclusion to lead to $60 billion in additional fund inflows in the first phase, which begins on June 1, though industry estimates vary widely.
The move is significant because it marks the first time that funds which track indexes have been forced to invest in mainland markets, rather than the offshore Chinese stocks listed in Hong Kong and New York that are already part of the MSCI universe.
An estimated $1.9 trillion tracks the MSCI’s emerging market index.
“There has been a very considerable interest from a very broad and large number of our clients, from all jurisdictions,” said Richard Heyes, Citigroup’s regional head of equities.
Citi aims to increase its China coverage to 250 stocks by end-2018, from 170 last year, and plans to add six more staff to its China research team.
Under the stock connect system linking Hong Kong to the Shanghai and Shenzen exchanges — through which most of the MSCI flows are expected to go — the number of trading accounts rose to over 4,000 this month from about 1,000 in January last year, stock exchange data showed.
Foreign ownership of stocks in China represent just over 2 percent of its nearly $9 trillion market capitalization, and muted overseas interest and accessibility have to date weighed on demand for company research and broking services.
“With the MSCI inclusion, China has now become a mainstream market,” said Jason Yates, Asia head of execution services for Morgan Stanley institutional equity division. It has doubled China coverage to more than 200 stocks in three years.
Caroline Yu Maurer, head of Greater China equities for BNP Paribas Asset Management, said it is looking to expand coverage to 500 Chinese stocks over time from a few hundred now.
JPMorgan plans to double the firms it covers to more than 200 this year, focusing on large caps, Ryan Holsheimer, head of its cash equity sales and trading for Asia Pacific.
HSBC, the only foreign bank to own a majority stake in a China securities joint venture, and UBS are also working on plans to ramp up investments in teams and technology.
“At the moment, we have 117 analysts who cover 220 A-share stocks ... MSCI inclusion and increasing demand will ensure that both the number of analysts and the stocks covered will increase substantially,” said Thomas Fang, UBS head of China equities.