New A-share futures balance investment in China

香港交易所 ·  Apr 19, 2022 19:14

Written by: Xiao Peicong, Co-Director, Securities Product Development Department, Market Section, Hong Kong Exchanges and Clearing, April 4, 2022

Technological development and digital transformation have changed China's economic landscape. International investors are increasingly interested in China's new economic sectors. The international market may need stock indices that reflect China's macro-economic situation and capture the growth momentum of new industries, as well as balanced investment indicators and risk management tools covering the performance of various industries. The MSCI China A50 Interconnection Index Futures launched by Hong Kong Exchanges and Clearing in October last year responded to this demand, and its surrounding ETF and other investment products also attracted attention.

A-share offshore hedging products are scarce

In recent years, with the continuous opening of China's capital market and the maturity of the Shanghai-Shenzhen Stock Connect, the foreign investment portfolio of A-shares is becoming more and more diversified, and the position value has increased year after year, reaching 3.94 trillion yuan by the end of last year. International investors have a certain hedging demand for A-shares. However, in the past, the choice of offshore A-share hedging tools is limited, and the traditional A-share index weights are concentrated in individual industries such as financial and consumer necessities, which may not be an ideal hedging tool for diversified A-share portfolios.

Although futures contracts are also used as risk management tools in the onshore market, they are only used by qualified overseas investors, and there is a gap in the demand of international investors in managing the risk of A-share positions.

In October last year, the new China A50 Interconnection Index released by MSCI of Hong Kong Communications Co., Ltd. was used as a benchmark to launch futures contracts to provide international investors with a balanced industry representative of China A-share investment and risk management tools in the offshore market. In February, the new product had an average daily turnover of more than 23000 contracts (nominal value of $1.5 billion), open contracts of more than 27000 contracts (nominal value of $1.8 billion), and a new high of more than 65000 contracts on February 16.

The continued increase in liquidity will help to narrow the spread. during the daytime trading session in December 2021, the average monthly contract spread of the futures is about 2 pips, which is lower than the 3.5 pips in October 2021, which may help to reduce transaction costs.

As the design of the benchmark index has the characteristics of balanced allocation of the industry, it can cater to investors with different investment needs, such as hedge funds, asset management companies and so on. Investors can use the futures contract as the core allocation of China's investment portfolio or as a hedge against systemic risks in the A-share market, and some financial institutions use the new futures for proprietary trading and arbitrage operations.

Develop a new series of A-share products

In addition, the MSCI China A50 Interconnection Index has also attracted a number of ETF issuers to launch ETF in the mainland, Hong Kong and the United States, enriching the product ecosystem of the relevant index. Among them, the first-day trading volume of ETF products sold in the mainland market exceeded 10 billion yuan, while in the Hong Kong market, the market value of the three ETF products that track the index rose to more than HK $3 billion within three weeks of listing.

Thus it can be seen that investors everywhere have a demand for investment benchmarks that can evenly represent the Chinese market and cover new economy industries. Futures and related products with the MSCI China A50 Interconnection Index as the benchmark have attracted much attention. With the gradual increase of foreign investment in A-share market and the pursuit of more diversified asset allocation, Hong Kong Exchanges and Clearing's new A-share futures may provide appropriate risk management tools for international investors.

All investments involve risks, while A-share futures products carry risks in the Chinese stock market, so investors should know the details of the products before making investment decisions.

Source: the original article was published in the Hong Kong Economic Daily on February 21, 2022, with slight adjustments.

The translation is provided by third-party software.

The above content is for informational or educational purposes only and does not constitute any investment advice related to Futu. Although we strive to ensure the truthfulness, accuracy, and originality of all such content, we cannot guarantee it.
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