Caixin
Jul 28, 2020 07:59 PM
FINANCE

Overseas Investors Get More Offshore Tools to Hedge China Market Risks

The Shanghai and Shenzhen A-share markets are among the biggest in the world and Chinese regulators have been encouraging international participation.
The Shanghai and Shenzhen A-share markets are among the biggest in the world and Chinese regulators have been encouraging international participation.

Hong Kong’s bourse operator has responded to calls from international investors in China’s stock markets for more hedging and derivatives tools to manage their risks.

Hong Kong Exchanges and Clearing Ltd. (HKEx) on Monday listed its first A-share leveraged and inverse products tracking the CSI 300 Index, a benchmark index comprising the 300 largest and most liquid A-share stocks. These leveraged exchange-traded funds (ETFs) will allow investors, at a relatively low cost, to increase their returns during short-term gains in the market or to hedge against declines, the company said in a statement.

China Asset Management (Hong Kong) Ltd. and CSOP Asset Management Ltd. each launched two swaps-based products — leveraged products which seek to achieve twice the daily returns of the CSI 300 and inverse products that will provide the opposite daily return of the gauge, HKEx said.

The introduction of the products “comes at an opportune time when international capital is flowing into the mainland stock market at an unprecedented rate,” Brian Roberts, head of exchange traded products at HKEx, said in a statement. “The listings today will complement our widening array of A-share products in Hong Kong, and underpins our strategic commitment to continue to develop Hong Kong as Asia’s ETF marketplace.”

Recent record turnover in HKEX’s northbound stock connect channel indicates that there is strong appetite for A-share products such as these, Roberts said.

The products are ChinaAMC Direxion CSI 300 Index Daily (2x) Leveraged Product, ChinaAMC Direxion CSI 300 Index Daily (-1x) Inverse Product, CSOP CSI 300 Index Daily (2x) Leveraged Product and CSOP CSI 300 Index Daily (-1x) Inverse Product.

A leveraged or inverse exchange traded fund (ETF) seeks to achieve short-term investment results that correspond to the daily leveraged or daily inverse of the underlying benchmark, according to the HKEx’s website. For instance, if the CSI 300 Index rises 1% on a day then the ChinaAMC Direxion CSI 300 Index Daily (2x) Leveraged Product should rise 2%, while the ChinaAMC Direxion CSI 300 Index Daily (-1x) Inverse Product should fall 1%, Frederick Chu, the head of ETF business of ChinaAMC, explained.

Chu said that investors would favor such investment products because the minimum investment amount is relatively low and they are exempt from stamp duty. If global market volatility emerges in the second half of the year, retail and institutional investors can use such products to deploy flexible A-share investment strategies, he said.

The market for A-share leveraged and inverse products in Hong Kong is likely to surpass that for the Hang Seng Index, rising to about $3 billion in the next two years, said Ding Chen, CEO of CSOP Asset Management.

The Shanghai and Shenzhen A-share markets are among the biggest in the world and Chinese regulators have been encouraging international participation as part of the government’s strategy of opening up the capital markets. But overseas investors have continually complained about insufficient access to hedging and derivatives instruments that would allow them to bet both ways on the direction of the market and manage their risks. Investors using the QFII and RQFII programs, for example, aren’t able to use some hedging instruments that investors using other channels are allowed to use.

Contact reporter Timmy Shen (hongmingshen@caixin.com) and editor Nerys Avery (nerysavery@caixin.com)

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