As one of the leading international financial centres, Hong Kong boasts a well-established infrastructure and close integration with global financial hubs. However, what really differentiates Hong Kong from other global cities is its role as the super connector connecting China with the world. Underpinning this competitive advantage of Hong Kong is a comprehensive China product ecosystem that channels foreign capital into onshore investments, and the newly launched MSCI China A 50 Connect (USD) Index Futures, the first A-share futures contract in Hong Kong, only adds to the city’s appeal to offshore investors.

The most complete offshore China product suite

Hong Kong’s development as the dominant gateway to China for international investors has spanned three decades. The journey started with the listing of Tsingtao Brewery at HKEX in July 1993, which marked the beginning of the H-share market. Hong Kong’s flagship H-share benchmark, the Hang Seng China Enterprises Index (HSCEI), was launched in 1994; about a decade later, in 2003, the HSCEI Futures contract was introduced and remains one of the most traded futures contracts in Hong Kong.

Another milestone in China-bound investment came with the opening of Shanghai-Hong Kong Stock Connect in 2014. Shenzhen-Hong Kong Stock Connect was subsequently launched in 2016, followed by the opening of Bond Connect in 2017. Stock Connect is now the most utilised A-share trading channel offering international investors direct access to onshore equities. By 2021, the average daily turnover (ADT) of Northbound Stock Connect reached RMB 120 billion, while the ADT of Northbound Bond Connect reached a record high of RMB 26.6 billion in the same year.

In addition, Hong Kong is the world’s largest offshore RMB centre providing a wide range of choices in RMB asset management and investment. With well-established settlement and post-trade market infrastructure, Hong Kong will continue to support RMB internationalization for years to come.

Product innovation is injecting impetus into Hong Kong’s China product suite with a number of newly launched equity derivatives hitting record highs in 2022. Among the record breakers, Hang Seng Index (HSI) Options on Futures (OOFs) saw open interest increased to 53,995 contracts on 18 March 2022, while open interest of HSCEI OOFs increased to 298,034 contracts on 17 March 2022.

Meanwhile, HKEX’s MSCI China A 50 Connect (USD) Index Futures contract, introduced in October 2021, saw a record single-day trading volume of 65,682 contracts on 16 February 2022. Since the new futures are built on China A-shares accessible through the Northbound Stock Connect channel, they are ideal tools for managing risks in A-share holdings traded through Stock Connect. Combined with other China-related product offerings available in Hong Kong, the new contract allows investors to consolidate their China investment in one marketplace. Investors can also use currency derivatives, such as RMB futures, to hedge exchange rate risk in their China portfolios.

An enhancing marketplace for China access

The diversifying China product ecosystem in Hong Kong is supported by an enhancing market structure. HKEX will proceed with launching Derivatives Holiday Trading for non-HKD denominated products in May 2022 to cover the Buddha’s Birthday public holiday, subject to market readiness and regulatory approval. All MSCI futures and options will be included as the first batch of holiday trading products. Upon implementation, investors will be able to trade non-HKD denominated products during Hong Kong public holidays when the markets of their underlying securities are open, in essence extending the market hours of eligible products.

Similar to all investments, futures products involve risks and A-share futures are closely associated with the risks of China’s stock market. Investors should understand the risks involved before entering into any futures contracts.

Credits: Content based on an article published in HKET on 22 March 2022