(Bloomberg) — Hong Kong Exchanges & Clearing Ltd. rallied by the most in seven months after receiving a long awaited clearance to offer A share index futures contracts, giving global investors a new tool to hedge China risk.
HKEX shares rose as much as 6.8% on Monday. Singapore Exchange Ltd., which had introduced the first index futures tracking A shares, slumped 4.9% as of 11:38 a.m. in Singapore.
The bourse on Friday signed an agreement with MSCI Inc. to launch futures contract based on the MSCI China A 50 Connect Index, tracking performance of 50 Shanghai and Shenzhen stocks that are traded via a link between the mainland and Hong Kong. The futures will start trading on Oct. 18, according to a statement.
After more than a two year wait, the bourse was granted approval to issue futures by the city’s Securities and Futures Commission and the mainland regulator. The new product is expected to generate fresh revenue for the exchange and comes at a time when Chinese stocks have been roiled by a broader crackdown on the private sector by Beijing.
The product will be a “game changer” for the mainland’s financial market, HKEX Chief Executive Officer Nicolas Aguzin said at a press briefing last week. He declined to provide an estimate on how much revenue the new product will generate for the exchange.
It will also bring China closer to an expanded inclusion in major global indexes. MSCI has listed a lack of access to hedging and derivatives as one pressing issue for the market.
Citigroup analysts, including Robert Kong and Yafei Tian, said in a note that the product could add about HK$1 billion ($128 million) in revenue for the Hong Kong bourse by 2024. The competing product to SGX’s FTSE China A50 futures will be viewed as “negative” for SGX’s share price, they said.
Hong Kong’s SFC said in a statement that the instruments will provide a significant new risk management tool and enable further growth of capital flows into the mainland. In a separate statement, China Securities Regulatory Commission gave its support for the launch and said it will continue to work with the SFC on derivatives regulations and cross-border risk management.
Hong Kong has been working on strengthening its ties to the mainland and build up its status as a center for trading the yuan. Financial Secretary Paul Chan said the introduction of the futures could strengthen the city’s function as an offshore yuan hub, as well as an international asset management and risk management center.
While Beijing’s crackdown on its private sector has brought volatility to the capital market, Aguzin said demand from international investors in investing in China through the Hong Kong remains strong over the long term.
The MSCI and HKEX first agreed on a pact to issue A share futures back in 2019. A shares are stocks that are denominated in the yuan and trade in Shanghai or Shenzhen.
(Updates share price.)
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