The development of technology and digital transformation is changing the economic landscape of China. International investors are increasingly interested in the xinjingji industry in China, and the international market may need stock indexes that can reflect China's macroeconomic situation, as well as investment indicators and risk management tools that capture the growth momentum of new industries and cover the performance of various industries in a balanced way. Responding to this demand, last October, the Hong Kong Stock Exchange launched the MSCI China A50 Interconnected Index Futures, with surrounding ETFs and other investment products also attracting attention.

Lack of offshore hedging products for A-shares

In recent years, as the Chinese capital markets continue to open up and the Shanghai-Shenzhen Stock Connect matures, foreign investments in A-shares have become more diversified, with the value of holdings increasing year after year, reaching 3.94 trillion yuan by the end of last year. Therefore, international investors have a certain hedging demand for A-shares. However, in the past, offshore A-share hedging tools were limited, and traditional A-share index weights are concentrated in individual industries such as finance and essential consumer goods, which may not necessarily be the ideal hedging tools for a diversified A-share investment portfolio.

Although the onshore market also has futures contracts as risk management tools, they are only available for qualified overseas investors. There is a gap in the demand of international investors for managing A-share holding risks.

In October last year, HKEX launched futures contracts using the MSCI newly released China A50 Interconnected Index as a benchmark, providing international investors with balanced industry representation for Chinese A-share investment and risk management tools in the offshore market. By February this year, the average daily trading volume of this new product exceeded 0.023 million contracts (nominal value of $1.5 billion), with open interest exceeding 0.027 million contracts (nominal value of $1.8 billion), reaching a new high trading volume of over 0.065 million contracts on February 16.

Increased liquidity helps narrow spreads. In the daytime trading session in December 2021, the futures contract had an average spread of about 2 ticks, narrower than the 3.5 ticks in October 2021, which may help reduce trading costs.

Due to the balanced industry configuration of the benchmark index, it caters to investors with different investment needs, such as hedge funds, asset management companies, and others. Investors can use this futures contract as a core allocation for Chinese investment portfolios, hedge systemic risks in the A-share market, and financial institutions can use the new futures for proprietary trading and arbitrage operations.

Developing a brand new series of A share products.

In addition, the MSCI China A50 Connect Index has also attracted many ETF issuers to launch ETFs in mainland China, Hong Kong, and the USA markets, enriching the product ecosystem of related indices. Among them, the ETF products sold in the mainland market had a first-day trading volume exceeding 10 billion RMB; while in Hong Kong market, the market cap of the three ETFs tracking this index had risen to over 3 billion HKD within three weeks of listing.

It can be seen that investors from various regions have a demand for investment benchmarks that can balance represent the Chinese market, and cover the xinjingji industry. The futures and related products based on the MSCI China A50 Connect Index as the benchmark have received significant attention. As foreign capital gradually increases its investment in the A share market and pursues more diversified asset allocation, the new A share futures of HKEX may provide international investors with appropriate risk management tools.

All investments involve risks, and A share futures products carry risks associated with the Chinese stock market. Investors should understand the product details before making investment decisions.