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China’s MSCI Index Denial a Boon for Singapore’s Plans

  • Singapore Exchange’s A50, MSCI China futures offer alternative
  • City-state’s focus reflects China’s growing role, says SGX

What’s bad for China may be good for Singapore.

MSCI Inc.’s decision to make China wait for its stocks to be added to global indexes is poised to direct investors to the city-state, which is home to a futures contract linked to mainland shares. Fund managers have been choosing to do business at offshore centers that are already part of the global financial system, rather than moving money into China, RHB Securities says.

It all means that Singapore is positioned to build on its role as a place for international investors to access the world’s second-largest economy. Singapore Exchange Ltd.’s FTSE China A50 contracts, which track the 50 biggest stocks, and its SGX MSCI China Free Index futures are attempts to gain an advantage over Hong Kong in providing foreigners with ways to play China’s growth at a distance.

“For SGX to have an established product like the China A50, that’s certainly a positive for the exchange,” said Michael Wu, a Hong Kong-based analyst at Morningstar Inc. who has a hold rating on the company’s stock. The exchange has a “first mover advantage with a product that’s out there and attracts the liquidity, creating a network effect.”

Climbing Volumes

Singapore bagged the FTSE A50 futures contract in 2006 and volumes have climbed steadily. Trading last year more than doubled from 2014 to 22.9 million contracts, according to data compiled by Bloomberg, making it one of the best performers on the exchange’s derivatives business. Last month, SGX rolled out its new MSCI index, which tracks Chinese companies listed outside the mainland, including e-commerce giant Alibaba Group Holding Ltd.

“SGX’s China-linked product roadmap clearly reflects the increasing role that China is playing within the international capital markets,” said Janice Kan, the company’s general manager for market development and strategy for Greater China. 

Hong Kong, which has long prospered in its role as a gateway to China, offers an alternative to Singapore. International investors can trade H shares, or Chinese companies listed on the former British colony’s stock market, as well as CES China 120 index futures, which track H shares and mainland-listed stocks.

“SGX is effectively a proxy to the Chinese market while Hong Kong-Shanghai connect gives direct, albeit regulated access to foreign investors,” said Benedict Cheng, a managing consultant at capital markets adviser GreySpark Partners.

To read about Hong Kong’s fragile position as China’s Wall Street, click here.

In explaining its decision to not include Chinese-listed shares, MSCI cited the need for additional improvements in the accessibility of the mainland market. The index compiler pointed to a monthly repatriation limit of 20 percent as a “significant hurdle” for investors such as mutual funds faced with redemptions.

Volumes on SGX’s A50 contracts surged last year as China’s stock market whipsawed and regulators clamped down on speculative trading. There was another jump earlier this year after the aborted introduction of circuit breakers on the mainland.

“Volatile environments mean more trading in futures,” said Leng Seng Choon, an analyst at RHB Securities who recommends investors buy SGX shares. “The planned Hong Kong-Shenzhen Stock Connect would be another catalyst for SGX and translate to more volumes for the A50 futures” as investors take advantage of price disparities between stocks on the mainland and in Hong Kong.

Hartmut Issel, UBS Wealth Management head of equity and credit for Asia Pacific, said he didn’t think there would be much spillover for Singapore from MSCI’s latest move. While the decision is a blow to China’s hopes of luring foreign flows, it’s doesn’t mean that Singapore will get those funds, he said.

(An earlier version of this story was corrected to remove a reference to the amount benchmarked to the A50 contract in the sixth paragraph.)

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