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MSCI China A 50 Connect and Hong Kong’s growing A-share ecosystem
Wilfred Yiu, Co-Head of Markets
Written by
Wilfred Yiu
Dec 20, 2021
15 minutes read

On October 18, HKEX launched its highly-anticipated MSCI China A 50 Connect (USD) Index Futures contract - how has it performed?

  • In simple terms, the market has adopted it and the contract has seen a strong response from investors.
  • On launch day, the contract saw the best notional Day 1 turnover of any futures contract launched on our market – and momentum has built from there.
  • Open interest has grown from a notional value of USD 250 million on October 18 and surpassed USD 2 billion on November 19.
HKEX is 13% of offshore A-Share futures market and growing…
 

After this encouraging start, the contract reached a 13% share of the offshore A-share futures market, both on a volume and open interest basis in the first week of December 2021, and a wide range of investors, including sovereign wealth funds, hedge funds, asset managers, and delta one trading desks, active in the market.

Given this context, we are confident that the encouraging volumes we have seen will set the stage for the long term. Why such confidence? In partnership with MSCI, HKEX has launched what we believe is a nuanced and attractive product with three key pillar propositions - let’s look at each in turn.

The MSCI China A 50 Connect (USD) Index Futures contract has seen a strong response from investors.
#1 Broad exposure to China’s economy

The MSCI China A50 Connect (USD) Index Futures contract offers what the market wants: broad exposure that better represents China’s overall economy.

The contract is constructed by selecting 50 names from the largest stocks listed in Shanghai and Shenzhen available via Stock Connect, and targets at least two stocks from each sector.

This construction makes it easy for investors to follow, as it represents both the top names and those that are Stock Connect-eligible. 

The largest sector weighting is around 18% - much less than other products on the market – and the sector-driven composition offers better diversified exposure to China and prevents overweighting in ‘old economy’ sectors, like financials and real estate, and underweighting in new economy sectors, like technology and health care.

Taking a broad-based, sector-neutral approach is, in our view, a more appropriate way to get representation of China’s market than by using a pure market-cap based approach.

In developed markets, market-cap indexes are an accepted standard because the market composition in economies like Japan and the US is relatively stable.

But China is a fast-evolving market where new sectors are rapidly emerging and companies are moving quickly from micro-to-mid-to-large cap status.

Therefore, a broad-based, sector-neutral approach may more accurately capture these dynamics and embody a forward-looking view of where China’s economy is headed.


MSCI China A50 Connect Index
#2 High correlation and low tracking error to A-share benchmarks
 

Tying the index sector weights more closely to representative sectors in China’s economy can also mean closer correlation.

There are a range of A-share benchmarks, but the CSI 300 index - which incorporates 300 large and mid-cap stocks traded on the Shanghai and Shenzhen stock exchanges - is generally regarded as being the definitive, broad-based benchmark for A-share markets.

Foreign Ownership

The MSCI China A 50 Connect Index Futures (USD) contract has demonstrated both high correlation and low tracking error to the CSI 300 benchmark index on a rolling 60-day basis since 2013, especially during volatile periods. That correlation during volatile periods - particularly during events driven by policy risk - is particularly valuable to risk managers.

#3 Appropriate sizing for institutional investors
 

As well as representing the complex dynamics of the A-share market, the contract has also been designed to meet the needs of what we see as an increasingly sophisticated investor base.

The market needs an institutional-sized hedging tool and the contract is four-to-five times larger than other alternatives in the offshore market.

Put together, we believe these aspects - broad-based sector composition, sizing, high correlation, low tracking error, and performance during periods of policy risk - make the MSCI China A 50 Connect Index Futures contract attractive to many different market participants.

MSCI A50: creating a richer A-share ecosystem
 

The MSCI China A50 Connect Index Futures (USD) Index contract also adds to the wide range of China investing products developed here in Hong Kong during the past thirty years.

The first step on that journey began with the listing of Tsingtao Brewery in 1993 and the start of the H-share market, which gave international investors access to Chinese companies.

The addition of the new contract transforms HKEX into the world’s most extensive and competitive offshore A-share equity and derivatives trading venue, offering investors the flexibility to express whichever view of China they want – all in a one-stop shop.

The next step included the launch of the Hang Seng China Enterprises Index in 2003, and then the opening of Northbound Stock Connect in 2013.

The MSCI China A 50 Connect Futures Index is Hong Kong’s first A-share futures contract, complementing established offshore derivatives that cover ADRs and H-shares.

Put together with the wider ecosystem of A-share ETFs and USD/CNH Futures and Options, the addition of the new contract transforms HKEX into the world’s most extensive and competitive offshore A-share equity and derivatives trading venue, offering investors the flexibility to express whichever view of China they want – all in a one-stop shop.

 

Positioned for the future
 

Flexibility in choice and market depth is important now, and will become increasingly important in the coming years. That’s because international investors are increasing their China asset allocations.

International investors have historically been underinvested in Chinese assets compared with China’s weight in the global economy. But a rebalancing process is beginning to play out. International investors have been growing their China allocations, increasing holdings of onshore equities and bonds over five times from RMB 1.3 trillion in January 2015 to RMB 7.5 trillion at the end of September 2021.

The rapid recovery seen in China’s economy, emergence of fast-growing ‘new economy’ sectors, ongoing reforms to open China’s capital markets, and the inclusion of China’s domestic bond and stock markets in global benchmarks are all driving the shift of international capital into China assets.

Foreign ownershop of China A-Shares and onshore bonds 2013-2021

We believe that these trends have a long way to run and that international investors’ demand for China exposure will continue to grow in the coming years.


HKEX – Connecting China, Connecting the world

That puts Hong Kong, and HKEX, in a unique position. The A 50 contract broadens our ecosystem of China A-share tools and strengthens our role as a super-connector linking international investors with opportunities in China.

More importantly, we offer the complete China product suite ranging from cash, derivatives, ETPs and Structured Products through our Connect and Hong Kong offerings.

And as we look to enhance the quality and attractiveness of our markets, we look forward to bringing more innovative products to the table and meeting the ever-more sophisticated demands of our customers and stakeholders.

And it’s this spirit of adapting to a changing world, connecting capital with opportunities, driving dialogue between communities, and building the businesses of tomorrow, that exemplifies Hong Kong at its best and underlines our key role at a time when the world needs more connections, not less.

Kevin Rideout
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