Hong Kong breaks Singapore’s grip on Chinese stock futures

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The Hong Kong exchange has seized market share from rival Singapore in Chinese stock futures, opening an all-out battle for control of how global investors hedge Chinese stocks.

The fight to become the dominant liquidity pool for so-called A-share futures pits not only the Hong Kong stock market against Singapore, but also Blackrock against Chinese fund companies and index provider FTSE Russell against MSCI, with implications for their global competitiveness.

Open interest in the Hong Kong A-share futures contract has reached as high as $2 billion since its launch in October. The rapid adoption is reminiscent of past changes in derivatives liquidity, such as the “Battle of the Bund” between Frankfurt and London in the late 1990s.

A-shares are shares of mainland Chinese companies listed in Shanghai or Shenzhen that trade in renminbi, unlike H-shares, which are listed in Hong Kong and trade in freely convertible Hong Kong dollars.

BlackRock, the world’s largest provider of exchange-traded funds, has built a large pool of assets tracking the FTSE China A50, the index underlying the Singapore contract. But three mainland Chinese fund companies have already raised $10 billion in assets to track the new MSCI China A50 Connect Index used by Hong Kong.

“I think the center of gravity is shifting,” said the head of Asia execution at a Wall Street investment bank, saying the next six months would be crucial in the fight for the market to term. “Liquidity is king when it comes to derivatives and hedging.”

Despite Hong Kong’s recent breakthroughs, Singapore remains the largest hedging center for Chinese equities. Open interest in Singapore futures stands at around $13 billion and liquidity has not declined since the Hong Kong launch, according to Refinitiv data.

But traders said Hong Kong’s success in establishing some initial liquidity suggested the city posed a significant threat. HKEX also waived its trading fees on new futures through June. Kevin Rideout, co-head of sales and marketing at HKEX, said the exchange could extend the waiver for another six months without regulatory approval.

There is a relentless appetite for $14 billion in Chinese stock market exposure. Offshore futures became a central tool for risk management, index tracking funds and structured products after Beijing severely curtailed onshore equity futures trading in 2015.

“When more investors hold Chinese assets, they need hedging,” said Eddie Yue, chief executive of the Hong Kong Monetary Authority, at a recent Financial Times event. “Hong Kong is the best place for risk management. So we’re looking at the range of derivatives we have here for that purpose. »

Strategists and traders said the differences between the indices would be one of the main factors in determining the winner of the futures contracts.

The FTSE product uses a simpler methodology, but competitor MSCI promises a better representation of the overall A-share market.

Column chart of annual futures volumes (lots, mn) showing that China's onshore equity futures have yet to recover from the 2015 boom

The FTSE index, which includes the 50 largest Chinese companies weighted by market capitalization, is dominated by the financial and consumer sectors, with names such as China Merchants Bank and Ping An Insurance as well as Kweichow Moutai, the baijiu spirit maker.

The MSCI index also only includes 50 companies, but is intended to be more representative of the broader market. “This index selects at least two names of stocks from all sectors,” said Kazuya Nagasawa, MSCI’s head of Asia. “It’s not just the biggest names, which leads to an industry bias.”

For example, Kweichow Moutai is 12.7% of the FTSE Russell index, but 8.3% of the MSCI version and less than 6% of the Chinese benchmark CSI 300.

If investors have the whole A-share market as their universe, then the most representative index would better cover their exposure, said Jason Lui, head of Asia strategy at BNP Asset Management.

FTSE Russell is considering changes to its index, chief executive Arne Staal told the FT in November, such as sector weighting and doubling the number of constituent stocks. BNP said the moves could bring the performance of the benchmark FTSE in line with that of MSCI, potentially erasing an advantage for Hong Kong.

Michael Syn, head of equities at SGX, said no decision had been made on whether to expand the FTSE index or the corresponding futures contract, but “the direction of time travel is more representative , more inclusion”.

The Singapore stock exchange and the FTSE must also be careful not to offend Chinese regulators, as abrupt changes to the futures contract could spill over to onshore markets in Shanghai and Shenzhen. The Hong Kong exchange has spent more than two years awaiting regulatory approval from Beijing after first announcing plans to launch MSCI-based futures in 2019.

The history of such battles for liquidity suggests that one contract will prevail. In the ‘battle for the Bund’, Frankfurt struggled to capture even a third of the market until gains began to accelerate in 1997, undermining London trade within a year. As demand for Chinese stocks soars, Singapore hopes history won’t repeat itself.

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