Hong Kong Bourse Jumps on China A Share Index Futures Launch

2/2 © Bloomberg. Pedestrians wearing protective masks walk past an electronic ticker displaying the share price of Hong Kong Exchanges & Clearing Ltd. (HKEX) at the Exchange Square complex in Hong Kong, China, on Wednesday, Aug. 19, 2020. HKEX posted a 1% gain in profit, benefiting from a spate of high-profile Chinese stock listings and a pick up in trading as the pandemic and political tensions stoked volatility. 2/2

(Bloomberg) -- Hong Kong Exchanges & Clearing Ltd. rallied by the most since January after receiving clearance to offer long awaited A share index futures contracts, giving global investors a new tool to hedge China risk. 

The bourse on Friday signed an agreement with MSCI Inc. to launch futures contract based on the MSCI China A 50 Connect Index, tracking performance of 50 Shanghai and Shenzhen stocks that are traded via a link to Hong Kong. The futures will start trading on Oct. 18, according to a statement. 

HKEX shares rose as much as 6.6% early Monday. Singapore Exchange (OTC:SPXCY) Ltd., which had introduced the first index futures tracking A shares, slumped 4.7% as of 10:14 a.m. in Singapore.

“HKEX receiving the green light to launch a competing product to SGX’s {{28930|FTSE ChChina A50 futures we believe will be viewed as negative for SGX’s share price,” Citigroup (NYSE:C) analysts including Robert Kong and Yafei Tian wrote in a note. They forecast about HK$1 billion ($128 million) revenue contribution to the Hong Kong bourse from the MSCI A Share futures by 2024.

“This is significant for China as the new A-share derivatives products will drive even more international investor interest into, and demand for, mainland China equities, supporting further development and internationalization of China’s capital market,” HKEX Chief Executive Officer Nicolas Aguzin said. The product will be a “game changer” for the mainland’s financial market, he said.  

After a long wait, the bourse on Friday was granted approval by the city’s Securities and Futures Commission and the mainland regulator. It will bring China closer to an expanded inclusion in major global indexes. MSCI has listed a lack of access to hedging and derivatives as one pressing issue for the Chinese market. 

It reinforces Hong Kong’s role as the leading global market in Asia, demonstrating its “pivoting role” in connecting China and the world, Aguzin said at a press briefing. He declined to provide an estimate on how much the new product could add to the exchange’s revenue. 

While Beijing’s crackdown on its private sector has brought volatility to the capital market, Aguzin said demand from international investors in investing in China through the Hong Kong remains strong over the long term. 

The SFC said in a statement that the instruments will provide a significant new risk management tool and enable further growth of capital flows into the mainland. 

In a separate statement, China Securities Regulatory Commission gave its support for the launch and said it will continue to work with the SFC on derivatives regulations and cross-border risk management.    

Hong Kong’s Financial Secretary Paul Chan said the introduction of the futures could strengthen the city’s function as an offshore yuan hub, as well as an international asset management and risk management center.  

The MSCI and HKEX first agreed on a pact to issue A share futures back in 2019.

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