Using A-share indices to invest in the diversified Chinese market

香港交易所 ·  Apr 19, 2022 19:56

Written by: Xiao Peicong, Co-Director, Securities Product Development Department, Market Section, Hong Kong Exchanges and Clearing, March 16, 2022

Using A-share index to invest in diversified Chinese market

China's economy is developing rapidly, and the market is constantly changing. if investors want to grasp the growth of the Chinese market, they need an objective and representative index as a reference. Since its launch in 2014, the connectivity mechanism has become the main channel for international investors to enter the A-share market, so an index that fits this channel and reflects China's economic development is an ideal indicator for A-share investment.

Balanced grasp of opportunities in China's A-share market

Although there are many benchmarks for tracking the performance of Chinese A-shares, such as the CSI 300 Index, the MSCI China A-share Index and the FTSE China A50 Index, these indices may have insufficient reference value for international investors who buy A-shares through the interconnection mechanism, as their range of stock selection is not the same as that of eligible A-shares under the interconnection mechanism. Recently, the index compilation company MSCI has launched an index-MSCI China A50 Interconnection Index, which is based on the interconnection mechanism and has a wide range of industry configurations, to provide a new benchmark for international investors investing in A-shares through interconnection and for related risk management.

The relevant index contains 50 stocks that can be traded through the Shanghai-Shenzhen-Hong Kong Stock Connect, but unlike the index which generally selects 50 stocks with the largest market capitalization (hereinafter referred to as the largest 50 stock index), the design of the new index focuses on industry equilibrium, its weight is adjusted to be close to the industry weight of the MSCI China A-share index (parent index), and the two stocks with the largest market capitalization after free liquidity adjustment are selected among the 11 industry sectors. The largest stocks are then included in the range of stock selection until the number of constituent stocks reaches 50. As a result, the index can cover a number of industries more evenly, preventing individual industries from being excluded from the index because of their small market capitalization, especially new economy enterprises such as health care and technology.

High correlation with major A-share indexes

Apart from using index futures to invest in a basket of constituent stocks, investors can also use this product as a hedging tool. Therefore, the correlation between the benchmark index and the relevant portfolio is very important. The correlation between the MSCI China A50 Interconnection Index and the CSI 300 Index which can reflect the A-share market is high, reaching 0.96. it is a reference index for investors to hedge their A-share portfolios. In addition, the balanced allocation of the index can also prevent its performance from rising and falling sharply due to the short-term fluctuations of individual industries.

To sum up, international investors are investing more and more in China's A-share market through the Shanghai-Shenzhen Stock Connect, which requires a representative investment benchmark and effective risk management tools. The design of MSCI China A50 Interconnection Index is based on Shanghai and Shenzhen Stock Connect qualified A shares, and the constituent stocks are mainly large stocks, and the industry allocation is balanced, which can avoid the index weight focusing on certain sectors. Offshore futures products based on the index can be used to hedge A-share investments or meet the needs of 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 March 8, 2022, with slight adjustments.

The translation is provided by third-party software.

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