News analysis

MSCI's blow to China may bolster Singapore

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 Singapore, which is home to a futures contract linked to mainland shares. Fund managers have been choosing to do business at offshore centres 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. The Singapore Exchange'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 Mr Michael Wu, a Hong Kong-based analyst at Morningstar Inc. The exchange has a "first mover advantage with a product that's out there and attracts the liquidity, creating a network effect".

Singapore bagged the FTSE A50 futures contract in 2006. Trading last year more than doubled to 22.9 million contracts from 2014, according to data compiled by Bloomberg, making it one of the best performers in the exchange's derivatives business. Last month, SGX rolled out its new MSCI index, which tracks Chinese companies listed outside the mainland.

Ms Janice Kan, the company's general manager for market development and strategy for Greater China, said: "SGX's China-linked product road map clearly reflects the increasing role that China is playing within the international capital markets." 

International investors can trade H shares, or Chinese companies listed on the Hong Kong stock market, as well as CES China 120 index futures, which track H shares and mainland-listed stocks. In explaining why it decided not to include Chinese-listed shares, MSCI cited the need for additional improvements in accessibility of China's market.

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 RHB Securities analyst Leng Seng Choon. "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.

However, UBS Wealth Management's Mr Hartmut Issel said that while MSCI's latest decision is a blow to China's hopes of luring foreign flows, it does not mean that Singapore will get those funds.

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A version of this article appeared in the print edition of The Straits Times on June 17, 2016, with the headline 'MSCI's blow to China may bolster Singapore'. Print Edition | Subscribe