The imminent launch of the Shanghai-Hong Kong Stock Connect scheme could be quickly followed by regulatory approval for the first A-share index futures vehicle listed in Hong Kong, an industry source has told AsianInvestor.
The only collective offshore product that allows international investors to hedge their A-share index exposures currently is SGX China A50 Index Futures, which was listed on the Singapore Stock Exchange (SGX) in 2006.
That vehicle has seen increasing trading volumes in the past few months. According to iShares, the exchange-traded funds unit of US fund house BlackRock, the 20-day average daily trading volume of SGX A50 futures contracts reached a record high of 175,564 in August, a 78% increase from May.
Cyrus Mui, vice-president at iShares based in Hong Kong, noted that international investor appetite for China A-Shares ETFs was driving demand for SGX A50 futures contracts as a hedging tool.
Both the iShares A50 and CSOP A50 ETFs in Hong Kong recorded average daily trading volume of 197 million shares and 176.5 million shares, respectively, over past three months. By contrast, average daily trading volume of other A-Share ETFs listed in the city (outside of the ChinaAMC CSI300 Index) is less than eight million shares.
“The best proxy for market participants to hedge exposure will be an SGX China A50 futures contract because its performance is correlated to A50 ETFs in Hong Kong,” explained Mui.
One ETF executive based in Hong Kong, who preferred to remain anonymous, told AsianInvestor there was a need for alternative hedging vehicles to the SGX China A50, given growing international demand.
“We have seen a lot of growth in SGX A50 futures contracts, with most demand coming from European and US investors,” said the source.
This has been driven by SGX’s extended trading of its A50 index futures vehicle to 16.5 hours a day to cover the European time-zone and half-day trading in the US.
Hong Kong's exchange, on the other hand, has a warrants and options market in which investors can hedge China A-share ETF exposure by using derivatives on individual stocks or short-selling positions in borrowed stocks. The iShares A50 ETF, for example, has had warrants written on it since 2007 and options since 2010, while physical A-share ETFs such as CSOP’s A50 have had options since January 2013.
But while investors can use existing hedging tools available in Hong Kong, the ETF executive argues that index futures contacts are more convenient for hedging and leveraging exposures.
“We hear that both the Hong Kong and Shanghai stock exchanges have been engaged in a lot of discussions about launching an A-Shares index futures vehicles in Hong Kong,” the source said.
He believes Chinese authorities will be more likely to introduce a futures product based on the CSI300 Index as opposed to the FTSE A50 since it is a domestic benchmark. This, in part, is a reflection of Chinese regulatory concern over the short-selling behaviour of international investors.
The source noted, too, that onshore futures trading of the CSI300 index by domestic Chinese investors had grown in popularity, providing much-needed liquidity to the market and driving usage.
The index saw total trading volume of 18 million contacts last month, a 63% increase from the same period in 2012, according to data from China Financial Futures Exchange.
Hong Kong exchange introduced CES 120 futures contract in July last year. The underlying CES China 120 Index comprises 80 A-shares and 40 H-shares of Chinese companies listed in Hong Kong.
Singapore exchange partnered FTSE Xinhua Index to introduce SGX China A50 futures in 2006. The Shanghai and Shenzhen exchanges subsequently filed a lawsuit against FTSE Xinhua Index for violating intellectual property on data usage. The parties reached a settlement in 2010.