Hong Kong’s stock exchange and MSCI have agreed to launch futures contracts on the A-share portion of the global index provider’s flagship Emerging Markets index, laying the groundwork to allow international investors to hedge risk from their exposure to Chinese equities.
The announcement comes just over a week after MSCI decided to fast-track an increase in China’s weighting in its EM index — an influential benchmark tracked by $1.9tn of funds — bringing forward to November the move originally planned for May next year.
“This new agreement with MSCI will facilitate the development of a key risk management tool for international investors who need to manage their A-share equity exposure,” said Charles Li, Hong Kong Exchanges and Clearing chief executive, in a statement on Monday.
The MSCI China A Index, for which futures are to be made available, will comprise 421 large and mid-cap stocks listed in Shanghai and Shenzhen and accessible via the stock connect programmes between the two mainland exchanges and the Hong Kong exchange. The Hong Kong exchange said the China A Index would represent the A-share portion of the MSCI EM index.
The futures contracts announced by HKEX on Monday would represent the first channel for investors using the stock connect links to hedge risk in the A-share market.
They are set to be introduced, subject to regulatory approval, in November, when MSCI is slated to complete the inclusion of 168 mid-cap A share stocks in its EM index.
Thomas Gatley, China corporate analyst with Gavekal Dragonomics, a Beijing-based macroeconomic research group, said the move would address one of the few remaining issues for MSCI, which noted the absence of a broader use of equities futures contracts in its inclusion announcement earlier this month.
“If there is a freely available liquid futures contract then that really helps,” Mr Gatley said.
As a result of the impending inclusion, China’s weighting in MSCI’s flagship emerging markets index will rise to 3.3 per cent by November from 0.71 per cent now. Analysts estimate that the reweighting could result in as much as $125bn of offshore money flowing into mainland Chinese stock markets.
Although there are stock index futures available domestically in China for major benchmarks such as the CSI 300 index of large-cap Shanghai- and Shenzhen-listed stocks, international access to these is limited to approved foreign institutional investors.
But while the new futures contracts would provide international investors with a tool to mitigate risk from exposure to A shares via MSCI’s EM index, they would stop short of allowing investors to take long or short positions on an individual stock.
HKEX said it would provide further details on the contracts and announce their launch date once the latter was determined.