Sep 16, 2021 10:48 PM

MSCI Outlines Regulators’ Role in New Offshore Stock Index Futures

Hong Kong Stock Exchange Square in May 2019. Photo: Zhang Wei/China News Service,VCG
Hong Kong Stock Exchange Square in May 2019. Photo: Zhang Wei/China News Service,VCG

As global investors get ready for the first offshore derivatives tool officially sanctioned by Chinese regulators to help them hedge the risks of investing in mainland A-share markets, the company that designed the underlying index has been explaining how it was put together.

Wei Zhen, head of Asia Pacific index solutions research at MSCI Inc., laid out the methodology and rationale behind the MSCI China A 50 Connect Index at a briefing Tuesday. More than 90% of overseas investors trade A-share stocks through the stock connect programs, and the new index was created with investor demand in mind by including various sectors and incorporating emerging industries, he said.

A-share index futures based on the new MSCI China A 50 Connect Index will start trading on Oct. 18 on Hong Kong’s stock exchange. The index was launched in August by U.S.-based global index provider MSCI Inc. and tracks the performance of 50 Shanghai and Shenzhen stocks available via the two stock connect programs that allow overseas investors to trade mainland-listed shares.

The introduction of the index futures comes at a time when China’s stock market has been rocked by tightening regulations on a broad swathe of sectors that have unsettled global investors, underscoring the need for traders to have more tools to hedge their exposure and control their losses.

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One factor that has made many overseas institutions cautious about trading mainland stocks is the lack of derivatives available to them to help hedge their exposure. MSCI has previously said that it won’t increase the weighting of A-shares in its global benchmark indexes until China addresses investors’ outstanding concerns that include access to hedging and derivatives instruments.

Until now, investors have hedged their exposure mainly through index futures traded on the Singapore Stock Exchange (SGX) that track the FTSE China A50 Index provided by FTSE Russell, a global provider of benchmark indexes and a competitor of MSCI.

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An index futures contract is a contract to buy or sell the underlying index on a future date at a specified price, allowing investors to control their exposure to stocks by hedging their positions. It is also a way for traders to speculate on the direction of the underlying index.

Wei said that the number of companies in the index is smaller than what the market was expecting, and this was due to considerations about risk and the need to take into account regulators’ views on financial stability.

MSCI worked closely with regulators on the design of the index and from internal research and development to its final release, the index passed the “strict approval” of China’s regulatory authorities, Wei said. Regulators needed to consider not only technical issues, but also financial stability and reform, he said. Given the characteristics of Chinese markets and their volatility, it was considered too early to launch an index and related stock index futures contracts that tracked 500 companies for example, Wei said.

The new index was created from the MSCI China A Index, a broad-based benchmark index comprising 474 large- and mid-cap A shares that are accessible through the northbound stock connect. Its components were chosen in two steps, Wei said. First, in order to ensure the index covered all major sectors, two companies with the largest market capitalization were chosen from each of the 11 sectors in the parent MSCI China A Index. Second, 28 companies with the largest market cap were selected from the other constituents of the parent index. The selected companies were then assigned weightings in proportion to their market value and sectors. The index will be reviewed and adjusted every quarter.

The 11 sectors represented in the MSCI China A 50 Connect Index are financials (19.04%), industrials (16.93%), consumer staples (15.3%), information technology (13.79%), health care (9.83%), materials (9.72%), consumer discretionary (8.34%), real estate (2.1%), utilities (1.94%), energy (1.9%), and communication services (1.12%). The constituents with the biggest weightings are Contemporary Amperex Technology Co. Ltd. (300750.SZ), LONGi Green Energy Technology Co. Ltd. (601012.SH), Kweichow Moutai Co. Ltd. (600519.SH), Wanhua Chemical Group Co. Ltd. (600309.SH), and China Merchants Bank Co. Ltd. (600036.SH).

The annualized rate of return for the MSCI China A 50 Connect Index from 2012 to 2021, based on back-tested data, is 10.86%, higher than the 9.15% rate of return of the MSCI China A Index over the same period, MSCI data show.

The China Securities Regulatory Commission said (link in Chinese) in August after the announcement of MSCI’s offshore futures contract that the launch could further attract long-term capital from overseas to invest in Chinese stocks and consolidate Hong Kong’s status as a financial hub. It also pledged that the reform and opening-up of China’s onshore futures market will be deepened and expanded.

The MSCI China A 50 Connect Index and the futures contract linked to it are the latest products to be offered by Hong Kong Exchanges and Clearing Ltd., the operator of the city’s stock exchange, to help overseas investors hedge their risks. In July 2020, it 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) allow investors, at a relatively low cost, to increase their returns during short-term gains in the market or to hedge against declines.

Contact reporter Zhang Yukun ( and editor Nerys Avery (

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