On August 20, 2021, the Hong Kong Stock Exchange announced the launch of its first A-share futures product - MSCI China A50 Internet Index Futures contract. On October 18, the MSCI China A50 Interconnect Index Futures Contract was officially listed on the Hong Kong Stock Exchange. According to the compilation rules of the MSCI China A50 Interconnect Index and the weight composition of the component : The stock index futures launched by the Hong Kong Stock Exchange is more in line with international investors and can more balancedly cover major industries and high-quality core assets in China.
At the same time, this is also the first MSCI index futures launched by domestic exchanges with the mainland A-share market as the base. Compared with the FTSE China A50 Stock Index Futures, which is currently active in trading, which is "listed in other places", the FTSE China A50 Stock Index Futures, which is more in line with the characteristics of China's new economy, and can also add the preferred hedging tools to foreign capital that prefers to allocate the Chinese economy, and the two may form a certain competitive relationship.
Will the "rooting and sprouting" of MSCI China A50 Interconnect Index Futures on the Hong Kong Stock Exchange cause a significant "return" of foreign capital allocated to A-shares through Shanghai Stock Exchange ? What impact will it have on the A-share market ecology and investment inspiration? This article will discuss the pricing power of the financial derivatives market, capital market volatility and the internationalization of the A-share market.
Financial derivatives market development and security perspective:
MSCI A50 futures may further stabilize the domestic "pricing rights"
Compared with the continuous opening of my country's financial market to the outside world, the current development of my country's financial derivatives market is relatively lagging behind. As we all know, the financial derivatives market plays an important role in preventing and resolving market risks, strengthening the global capital competitive position, and expanding financial opening up. Although the degree of opening up of the capital market to the outside world after A-shares was included in MSCI in 2018, the proportion of foreign capital holding market value in the A-share market has increased from 2.26% in 2018 to 4.17% in June 2021, far lower than other developing countries . This is directly related to the development difficulties faced by my country's financial derivatives market and the inability of international investors to participate in the transaction of existing derivatives such as stock indexes and treasury bonds (except a few QFIIs).
Review the development history of the global financial derivatives market. Since the 1980s, in the context of the accelerated development of global finance and innovative trading of financial derivatives, exchanges in some developed countries or regions such as Intercontinental Exchange, European Futures Exchange , SGX , etc. have begun to create stock index futures based on stock indexes in other countries or regions, in order to increase the attractiveness of their own market. For example, SGX has been committed to building Asia's leading offshore center and derivatives trading center, with 40% of its listed companies and more than 80% of its exchange bonds coming from Singapore overseas.
Before the launch of the Hong Kong Stock Exchange A50 Index Futures, SGX A50 Index Futures was currently the only A-share index standardized (FTSE China A50) hedging product overseas, and is highly related to the trend of major A-share indexes. At present, SGX A50 futures maintain a high trading volume and liquidity, and have had a certain impact on my country's stock market.
First of all, looks at the mechanism of futures guidance on spot prices through the mechanism of futures, the stock index futures price signals can reflect the market's expectations for the future. Stock index futures listed in other places have snatched the "pricing rights" of the local financial derivatives market to a certain extent. For example, in 1986 and 1997, the SGX took the lead in the local market to launch Nikkei 225 stock index futures and MSCI Taiwan stock index futures. Due to the local economic development in a relatively prosperous period and the cautious or strict control of financial derivatives, the SGX became an important offshore market for the above two products. The difficulty of the local market to take the initiative has increased. Some academic literature also points out that the SGX MSCI Taiwan Stock Index futures price discovery function is stronger than that of local futures and spot products.
Secondly, if there is an extreme risk event caused by malicious price manipulation or futures speculation trading in the off-site market, it will seriously affect the financial security of the local market.For example, in the "Bank of Bahrain" incident in 1995, the Singapore Exchange Nikkei 225 futures open futures contract held by the Singapore Branch of the Bank of Bahrain accounted for more than one-third of the entire market, with an amount of up to US$7 billion. This risk incident seriously threatened the security of the Japanese stock market. We can see that if the discovery ability of stock index futures listed in other places is too strong than that of the local market, or it forms an important pricing and trading reference for international investors, the corresponding will have a negative impact on the attractiveness and pricing power of the local market.
Based on the development and security perspective of my country's financial derivatives market, as for the launch of the international index MSCI A50 stock index futures in the domestic capital market, we believe that on the one hand, it enriches financial derivatives in the domestic market with Chinese characteristic stock indexes as the target, and the enrichment of domestic financial derivatives is conducive to the stability of pricing power; on the other hand, the development of A-shares in recent years has shown an increasingly "independent" feature, providing risk management tools for international investors to participate in the Chinese capital market, which can enable multinational capital to invest in the A-share market more safely and securely for a long-term investment in the A-share market, thereby accelerating the internationalization of the financial derivatives market; to a certain extent, the reduction of short-term cross-border capital flows and overseas risk transmission is also of positive significance to the stability of the RMB exchange rate market.
Hong Kong Stock Exchange A50 Stock Index Futures VS SGX A50 Stock Index Futures:
Additional effect is conducive to the "return" of foreign capital
The launch of this Hong Kong Stock Exchange MSCI China A50 Interconnect Index Futures Contract While increasing the price discovery efficiency of in my country's capital market, it will undoubtedly attract foreign capital that favors the "return" of A-shares. Generally speaking, stock index futures, as one of the most important financial derivatives tools, are better liquidity in the futures market and lower transaction costs in , making the futures market more sensitive to market information than the spot market, and the linkage between futures and spot can significantly improve the efficiency of capital market price discovery. However, judging from the development pattern of global stock index futures based on my country's stock index, the development of A-share-related derivatives in overseas markets is more active.
Singapore Exchange listed FTSE China A50 Index futures in 2006, more than three years earlier than the launch of my country's Shanghai and Shenzhen 300 Stock Index Futures , and seized the "opportunity" from the perspective of time. In 2015, my country's stock market experienced abnormal fluctuations. In order to stabilize the market, my country has taken restrictive trading measures on the three domestic stock index futures products ( Shanghai Stock Exchange 50, Shanghai Shenzhen 300 and CSI 500 valuation futures). Since then, the trading volume has been greatly reduced, and liquidity and functional performance have been restricted. Although there were three obvious loosenings to stock index futures between 2015 and 19, FTSE A50 stock index futures seemed to have seized the "opportunity" during this period, and their trading activity increased rapidly.
In particular, since 2018, the game situation of major powers represented by China and the United States has gradually deepened, and the two-way flow rate of international funds has increased under the disturbance of many uncertain risk events, which has further enhanced its preference for risk hedging by configuring the FTSE A50 stock index futures. In recent years, the trading volume of FTSE A50 futures has continued to increase in the share of the Singapore Exchange and its market share has also continued to increase. In the first half of 2021, FTSE A50 futures accounted for half of the total trading volume of derivatives on the SGX, accounting for as high as 53%.
It can be seen that funds are allocated to SGX A50 Stock Index Futures for the purpose of risk aversion or hedging. The funds composition of this includes not only domestic funds that use A50 Stock Index Futures as an important hedging tool for holding funds when placing new shares. The larger structure is the A-share interconnection mechanism, the north-to-nation funds, QFII foreign capital, and the passive funds tracking and allocating international indexes such as MSCI or FTSE on a global scale. We believe that with the launch of the MSCI A50 stock index futures contract , it may have a significant substitution effect on the SGX A50 stock index futures contract, and this part of foreign investment will significantly "return" to the domestic financial market. is the following reasons:
First of all, the industry characteristics represented by the MSCI China A50 Interconnect Index component stocks are more in line with the characteristics of China's new economy, enhance their attractiveness to foreign capital, and may become a weather vane for international funds to invest in A-shares.
The initial market positioning of SGX A50 stock index futures was to serve international investors who wanted to share the achievements of my country's economic development but could not enter the A-share market. They just occupied the "leading opportunity and opportunity" in their establishment and development. The MSCI A50 component stocks are more representative of the characteristics of China's current new economy: the industry distribution of the MSCI China A50 Interconnect Index is relatively balanced, reducing the over-allocation of the financial industry, increasing the weight of emerging industries such as information technology and health care, and in line with the changing trends of emerging industries. At the same time, "Interconnection" means that Science and Technology Innovation Board and Hong Kong stock high-quality targets, the industry covers a wide range and rebuilds technology. The MSCI China A50 Interconnection Index can also better match the allocation preferences of foreign capital such as northbound funds and QFII.
Secondly, the setting of MSCI China A50 Interconnect Index Futures Contract (MCA Contract) reverses the current situation of high transaction costs and weak convenience of the three domestic stock index futures, and enriches domestic risk hedging tools. Before this, in addition to using overseas SGX FTSE A50 stock index futures hedging, overseas investors mainly conducted risk hedging through two domestic channels: 1) hedging with margin trading, but the cost is high; 2) In 2020, CICC issued a notice on matters related to QFII/RQFII participation in stock index futures trading. QFII/RQFII can conduct risk hedging through the Shanghai Stock Exchange 50, Shanghai and Shenzhen 300 and CSI 500 valuation futures.
These two risk hedging methods have problems such as high margin and handling fees. FTSE A50 stock index futures have higher convenience: the contract value is small, the trading is high leverage , and the trading time is long, which is relatively attractive to international investors. In terms of futures contract settings, the trading rules of the MCA contract (MSCI China A50 Interconnect Index Futures) are relatively close to those of FTSE A50 Stock Index Futures. At the same time, the transaction fee of and cost has significantly decreased compared with the three major domestic stock index futures, and the convenience is significantly improved. In addition, futures contracts are priced in US dollars, and the trading time period is more in line with the trading habits of international investors.
Finally, compared with Singapore's offshore RMB financial center, Hong Kong has the location advantage of the global offshore RMB business hub, and is closer to the Chinese stock market. Hong Kong Financial Market can provide enterprises and institutions holding offshore RMB funds with one-stop deposit, management, allocation and investment in Hong Kong. The convenience brought by its status has a strong attraction to international funds, and international investment funds are more willing to "get away from home." The launch of the MSCI China A50 Interconnect Index futures contract from the Hong Kong Stock Exchange can also consolidate Hong Kong's financial market position to a certain extent.
reduces short-term irrational fluctuations in the market -
maintains a healthy and reasonable slow bull ecosystem for A-shares
From the development experience of Singapore's A50 stock index futures, the A50 stock index futures market structure of Singapore offshore is relatively mature, with international institutional investors accounting for 70%. The corresponding investor structure of the onshore A-share market risk hedging is relatively low, which has led to the continued pressure on the local market in the price discovery ability of the offshore market. In particular, the difference in trading time also causes the price discovery ability of SGX A50 futures in individual time periods may be better than the domestic market.
For example, before my country's three major stock index futures tightened in September 2015, from July 2014 to February 2015, the correlation between the FTSE A50 stock index futures of the SGX FTSE A50 stock index futures and the Shanghai and Shenzhen 300 index was 0.956, and the correlation with the Shanghai and Shanghai 50 index was 0.997. In 2018, after A-shares were included in the international index, the correlation between the FTSE A50 index and the Shanghai 50 index was as high as 0.992. It can be seen from this that the performance of FTSE A50 futures can be said to be "closely related" to the trend of the main A-share index. Many investment institutions have predicted the main A-share index based on the trend of FTSE A50 futures, creating the illusion that "foreign market prices guide internal prices". This deviation between domestic exchanges and SGX trading time and trading mechanisms is not conducive to domestic financial derivatives improving competitiveness, and has also increased the fluctuations in the A-share market in some time periods to a certain extent.
Especially since the epidemic, my country's monetary policy has adhered to the independence and autonomy of "mainly self-centered". Under the disturbance of overseas liquidity under the Federal Reserve reduction in QE and high inflation data, foreign capital's expectations of the "turning point" of monetary policy are disordered, resulting in the fast inflow and outflow of short-term international speculative positions, causing certain fluctuations in the short term to my country's stock market. We can see that since the impact of the epidemic, the A-share market has often shown high fluctuations around holidays. This may be because foreign investors are prone to "over-interpretation" of the fermentation of domestic risk events, which causes excessive reactions in the price of A50 stock index futures market, and thus fluctuations are transmitted to the A-share market.
Under certain circumstances, investors of SGX A50 stock index futures may overreact and deviate from fundamentals due to liquidity restrictions, market sentiment fluctuations, and change in risk preferences. They will be transmitted to the A-share market through international capital flows , cross-market trading, expectations and other channels, causing abnormal fluctuations in the prices of the three major market indexes. The cooperation between the Hong Kong Stock Exchange and MSCI to "compete" for the futures index market may increase the effectiveness of the futures and spot market. The Hong Kong Stock Exchange has long-term coordination and running-in with relevant mainland exchanges and regulatory agencies. While enhancing the competitiveness of the launch of A50 index futures, it can alleviate the "excessive" fluctuations caused by the short-term irrational speculation of the futures market to the A-share market.
Investment Inspiration: MSCI A50 Stock Index Futures Increases Attractiveness to Foreign Investment, and Institutional Improvement Promotes Long Bull Pattern
To sum up, from an investment perspective, MSCI China A50 Interconnect Index is more in line with the current development status of the domestic stock market and the trend of industrial upgrading. Correspondingly, the MSCI China A50 Stock Index Futures launched by domestic local exchanges is a derivative tool that is more in line with the characteristics of China's new economy:
2) MSCI China A50 Interconnect Index keeps pace with the high-quality leaders in emerging industries such as industrial manufacturing, information technology, and health care in the A-share market and adjusts quarterly. Under the financial open pattern, with the economic resilience of China's economy after the epidemic, it has vigorously guided international medium- and long-term funds to flow into the core key areas of national research through innovative development of derivative tools.
From the US experience, after the 1980s, the rapid development of the US financial derivatives market has improved the risk management capabilities, capital flow speed and efficiency of US capital market , allowing the US domestic and international capital to enter the capital market on a larger scale. The improvement in the size and operational efficiency of the capital market directly provided capital guarantee for the explosive growth of a series of technological innovations such as the Internet, mobile communications, and biotechnology in the late 1990s. At the same time, during the process of industrial upgrading, foreign capital influxes into the stock market as medium- and long-term funds, which can improve the level of institutionalization and promote the long-term bullish pattern of the A-share market.
With the launch of the Hong Kong Stock Exchange A50 stock index futures, the first batch of four MSCI China A50 ETFs in China in October 2021. It is expected that the Shanghai Stock Exchange may continue to launch a series of ETF products in the future to enrich the asset allocation and trading tools of domestic investors. MSCI China A50 ETF tracks high-quality leaders in the Chinese industry, with a wide coverage and a more "new economy" component structure; at the same time, based on the international index, the investor structure may be more mature, and the expected product yield may be more stable, in line with the hedging tool of the MSCI A50 stock index futures on the Hong Kong Stock Exchange, the expected product yield may be more stable.
Risk warning: MSCI China A50 ETF fund issuance and fundraising implementation is lower than expected, the domestic macroeconomic declines beyond expectations, and the Hong Kong Stock Exchange futures market supervision risks.
This article is from the Financial Network
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