China’s new economy — and markets — appear to have found a new hedging tool.
In an interview with John Lothian News, Kevin Rideout, managing director, global client development at Hong Kong Exchanges and Clearing Limited (HKEx), talked about the launch and reception for MSCI China A 50 Connect Index Futures, launched on October 18.
The contract is based on the broad-based MSCI benchmark index, which captures large- and mid-cap China A-shares listed on the Shanghai and Shenzhen stock exchanges and are accessible through Northbound Stock Connect.
So far, the contract appears to be exceeding expectations, Rideout said. According to research reports from major banks, the markets expected the HKEx contract to reach an average daily volume of around 20,000 ADV by the first quarter of 2022, and it has surpassed that, with a record ADV so far of 22,000 contracts, he said. “Thanks to the market, there’s been great support,” he added.
Rideout attributed interest in the contract to its “broadness,” which looks across all of the sectors and makes sure China is properly represented in the new economy. “Now the weighting is beyond banks and properties,” he added. “It makes sense to represent China as a growing broad-based economy.”
People also like the size of the contract, Rideout said. “It represents China as a growth engine on its way to be the largest economy in the world, and from a BBB perspective, it already is,” he said. “So it makes sense to have the only offshore hedging tool in a mini size.“
The diversity of participation has been noteworthy. Delta one desks are repositioning in Asia, and HKEx is also seeing pension funds “making a little bit of a switch,” Rideout said. The contract also benefits from an increased weighting of clean energy companies in its top constituents, to 17% from about 3%.
Long-end investment managers within the region “are participating in a quieter fashion at the moment,” he said, and U.S. institutions still are not coming in. “There is still a bit of work to be done.”
The feedback from U.S. banks is that the HKEx product is similar to the Singapore Exchange’s (SGX) version of the A50, “so we have to differentiate,” Rideout said. “It’s not necessarily the markets, it’s education.”
“What’s glaringly obvious is that there is a need for options, which have not been approved yet,” Rideout said, “so we have to wait until futures are viewed as more successful.”
Looking at the larger market, Rideout said the next three to six months are going to be all about ETF growth, as well as emerging structured products around other Asian countries.
“The next three, six, 12 months is going to be about building assets around this … then I think we have the right to say what’s next,” Rideout said.