Hong Kong's new A-share futures for mainland investors

- Hong Kong is starting contract for futures that make it easier for mainland investors to bet on mainland Chinese stocks, increasing rivalry between the city s bourse and its Singapore counterpart.

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While Hong Kong provides better liquidity, fewer holidays and a mature offshore derivatives ecosystem, Singapore has a stock trading link with mainland China and the underlying index that the contracts will use has more balanced sector weightings, they said.

With huge global demand for exposure to China s $12 trillion offshore equities market and Beijing cracking down on private enterprises ranging from education and technology sectors, there is increasing interest in the futures contracts to hedge risks.

There will be greater earnings boost for the Hong Kong bourse in the near term and limited earnings upside risk of SGX, analysts Yafei Tian wrote in a note earlier this week, adding the former looks better positioned in A-share derivatives in the longer term.

SGX shares slumped more than 4% on Aug. 23 after Hong Kong announced that it would launch futures built on an MSCI Inc. measure that gives access to 50 mainland stocks. HKEX went up almost 6% that day.

Over the medium term, HKEX A 50 futures will become the biggest offshore alternative for A share equity investments product, Goldman Sachs Group Inc. analysts wrote in a report late in September. They added that while trading volume for MSCI index-based futures is typically negligible for the first two years, the new product could add about 5% to HKEX's revenues by 2025.

Singapore s A 50 futures product, which tracks the FTSE China A 50 index, was launched in 2006 and had no direct competition until now. The futures accounted for about 10% of the total revenues of SGX and 29% of derivatives revenue in the fiscal year 2021, according to Citigroup research.

The Singapore bourse has built its derivatives product on this gauge and an expansion of the index could pave the way for it to increase exposure to the market, Michael Syn, SGX's CEO of Equity, said in an interview.

The turnover of China s derivatives market versus cash equities is still very, very low and the offshore futures market compared to onshore is much smaller, leaving space for growth, he added. Bloomberg Intelligence estimates that the futures could contribute 13% to SGX revenue by 2023 if overall offshore A-shares derivatives revenues grow compounded by 22% each year.

Singapore's exchange doesn t shut down when a typhoon hits and the design of the underlying index for contracts is efficient and leads to low fees, SGX s Syn said.

Trading costs could be a concern with the MSCI China A 50 Connect Index, which tracks some of the biggest mainland stocks from each sector, as the gauge uses several measures to balance out industry weighting. In comparison, the FTSE measure is the largest onshore share weighted by market cap.

The MSCI index has a big drawback of higher index turnover, which could result in higher trading costs, said Brian Freitas, an analyst who provides research via the Smartkarma platform, in a note on Thursday.

For the HKEX, the new futures contract offers a much more cost-effective alternative to existing A-share hedging solutions such as swaps and other listed A-share index derivatives, a spokesperson at the bourse said in an email, adding that the exchange looks forward to continuing to develop Hong Kong's leading position as Asia s derivatives hub. How do presidents Donald Trump, Elon Musk and Gwyneth Paltrow think about what are effective?

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