Hong Kong’s status as an international financial hub faces new challenges after the US federal pension fund decided to exclude Hong Kong-listed stocks from its international fund benchmark index.
The decision was announced by the US Federal Retirement Savings Investment Board (FRTIB) on Tuesday, ahead of a meeting between Chinese President Xi Jinping and US President Joe Biden in San Francisco on Wednesday. At a dinner Wednesday night, President Xi called on the U.S. business community to increase investment in China.
FRTIB conducts regular reviews of four benchmark indices following the Thrift Savings Plan (TSP) and adjusts the International Stock Index Investment Fund (I-Fund), which had an asset size of USD 68 billion as of 2016. announced that it had been decided. End of last month. He said he reviewed Aon’s recommendations from employees and investment consultants.
“Given events such as restrictions on investment in sensitive Chinese technology, delisting of Chinese companies, and sanctions on Russian securities due to the Russia-Ukraine conflict, overall investment in emerging markets has declined in recent years. “The complexity of our operations is increasing,” Aon said. Said.
“Unexpected events of this type can incur trading costs and cause fluctuations in performance and volatility,” the company said.
He said the announcement of investment restrictions could cause stock values to fall at a time when investors are forced to sell. Given the I-Fund’s asset size, forced sales and investment restrictions could result in higher-than-average market impact costs due to liquidity issues, the report said.
We are working with fund managers to implement the transition from the current index (MSCI Europe, Australia and Far East Index (EAFE) Index) to the next index (MSCI All Country World (ACWI), Investable Excluding US, China and Hong Kong). The next index is expected to outperform the current index on a risk-adjusted basis over the long term.
hong kong assets
MSCI ACWI IMI (Excluding US, Excluding China, Excluding Hong Kong), launched This June, we offer exposure to 5,621 large-, mid- and small-cap stocks across 21 developed and 23 emerging markets.
The MSCI EAFE Index currently provides exposure to 798 large- and mid-cap stocks in 21 developed markets. Hong Kong stocks account for about 3.3% of the index’s assets, according to the index. Geographical breakdown Similar MSCI index.
If the I Fund had closely tracked the MSCI EAFE index, it should have allocated US$2.2 billion of its assets to the Hong Kong market.
US-based Hong Kong commentator Simon Lee pointed out that the I Fund’s asset size in Hong Kong is relatively modest. However, he predicted that the fund’s exit would still have a negative impact on the city’s stock market.
“In general, the United States now views China as a risk rather than an opportunity, and does not treat Hong Kong as an independent economy from mainland China,” Lee said. “Since the TSP is a flagship, some state-level pension funds may follow suit if the TSP leaves Hong Kong.”
He said TSP’s withdrawal would accelerate Hong Kong’s capital outflows and hurt Hong Kong’s status as an international financial hub.
A columnist living in Shanghai says this in an article. article Shares of 29 Hong Kong-listed companies, including AIA Group Ltd, Hong Kong Exchanges and Clearing Ltd, CK Hutchison Holdings and Sun Hung Kai Properties Ltd, will come under downward pressure as TSP fund managers sell stakes next year .
The Hang Seng Index, a benchmark for Hong Kong’s stock market, has fallen 13.4% since the beginning of the year. The Shanghai Composite Index, which tracks the A-share market, fell just 2%.
President Trump’s decision
In November 2017, FRTIB decided that the I Fund would follow the MSCI ACWI IMI ex USA rather than the MSCI EAFE index as a way to enter the A-share market.
As of July 31, 2019, China is the third most invested country within MSCI ACWI IMI (excluding the US), accounting for 7.56% of index assets.
In August 2019, U.S. Senators Marco Rubio and Jeanne Shaheen told FRTIB Chairman Michael Kennedy: letter Some of the funds of U.S. federal employees may have been invested in Chinese companies that pose national security, human rights, and financial disclosure risks.
FRTIB was ordered by the Trump administration to cease investing in A-shares in May 2020.
As of the end of March 2020, TSP held funds of USD 557 billion. assets Meanwhile, its I Fund was USD 41 billion.
This was reported by the state-run newspaper Economic Daily. Explanation In 2020, TSP’s withdrawal was thought to have negligible negative impact on the A-share market.
Citing estimates from Bocom Schroders Asset Management, all pension funds in the United States total US$30 trillion, but only US$1.9 trillion of that is managed by the US federal government, with the rest being managed by state governments. and is owned by the private sector.
He added that only $15 billion of U.S. pension funds are allocated to Greater China, most of which is in Hong Kong.
Ministry of Foreign Affairs of China in May 2020 criticized The US government blocked US investors from entering the Chinese market and politicized the issue in the name of national security. He said such measures would hurt the interests of U.S. investors.
‘Butterfly effect’
In the first 10 months of this year, the average daily trading volume of the Hong Kong stock market was HK$106.6 billion (US$13.7 billion).market capitalization As of the end of last month, it had reached HK$30.8 trillion (US$3.95 trillion).
Some analysts say I-Fund’s $2.2 billion investment in Hong Kong is insignificant, accounting for only about 16% of the market’s daily volume and 0.06% of its market capitalization. .
However, they fear that if more institutional investors leave Hong Kong, there will be a “butterfly effect” that could lead to a market crash.
In October 2022, the Teachers Retirement System of Texas, which manages a $184 billion public pension fund, will cut Target allocation in China is from 3% to 1.5% of assets.
In April of this year, the Ontario Teachers’ Pension Plan (OTPP), Canada’s third largest pension fund, closed The company has fired its Hong Kong-based Chinese equity investment team.
On Wednesday, lawmakers passed the following bill: invoice It is hoped that the stamp duty on stock transactions will be reduced from 0.13% to 0.1%, increasing the competitiveness of stock exchanges.
Read: BlackRock and MSCI investigated for investments in China
Follow Jeff Pao on Twitter. @jeffpao3
