A-share derivative product launch to fortify Hong Kong's role

Hong Kong's first A-share derivative product made its debut on Monday, further cementing Hong Kong as an international hub for managing financial risk.

Hong Kong Exchanges and Clearing, the city's stock market operator, launched the MSCI China A 50 Connect Index Futures on Monday. As a financial derivative product that is highly correlated to a major A-share index, MSCI China A 50 Connect Index Futures provides an efficient risk management tool for international investors to manage A-share exposure.

HKEX has entered a license agreement with MSCI, the United States-based provider of financial indexes, to launch a futures contract based on the MSCI China A 50 Connect Index, a broad-based benchmark index which captures large and mid-cap A shares listed on the Shanghai and Shenzhen bourses and makes them accessible through the Northbound Stock Connect.

"The launch of the first A-share futures contracts in Hong Kong represents a milestone to open up a channel for foreign investors to further tap into the Chinese mainland, and also marks the higher degree of internationalization of the nation's capital markets," HKEX Chief Executive Officer Nicolas Aguzin said at the launch ceremony held in Hong Kong.

The close ties with the Chinese mainland are pivotal in making HKEX different from other international financial hubs, said Aguzin, who pledged broadening the investor base for the mainland market remains the top task of the Hong Kong stock exchange.

Global investors currently hold total assets of 2.5 trillion yuan ($390 billion) through northbound trading of the two stock connectivity programs, Aguzin added.

The MSCI China A 50 Connect Index Futures are denominated and cash-settled in US dollars, and trading hours of the futures cover the Asian, European and US time zones.

Since MSCI included China A shares in its emerging markets index in 2018, the net exposure of A shares in global investment portfolios reached $450 billion as at end-June, whereas at least 70 percent of the portfolios were constructed through northbound trading of Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect, according to Henry Fernandez, chairman and chief executive officer of MSCI.

"This new financial derivative product enables investors to enhance clarity and transparency in the investment process. We believe the product launch can facilitate the development of the ecosystem of financial derivative products in Asia, and bolster Hong Kong's status as a global financial risk management hub," Fernandez added.

"This A-share derivative product is essentially useful for large institutional investors such as mutual fund companies and exchange-traded fund managers in Hong Kong to hedge the volatility of the onshore A-share market," said Billy Mak Sui-choi, associate professor at Hong Kong Baptist University's Department of Finance and Decision Sciences.

With such an A-share financial derivative tool being accessible, this can fortify the risk management function of the Hong Kong financial market which can in turn consolidate the city as the premier asset management center in the Asia-Pacific region, Mak told China Daily.

Other products can also be available, for example, such as allowing mainland investors to use the renminbi currency to purchase Hong Kong shares through the Southbound Stock Connect, thus eliminating currency exchange rate risks, Mak added.