Investors currently use A-shares ETFs to hedge against their Chinese equities position by going short in the funds. But ETF managers expect the index futures will not undermine overall turnover of the ETF, conversely, the ETFs have been gathering significant capital flow in the first few months this year with the bullish run of Mainland stock market.
The HKEX signed a licence agreement with MSCI to introduce the MSCI China A index futures on March 11, subject to regulatory approval and market condition.
The MSCI China A Index represents the A-share portion of the MSCI Emerging Markets Index.
MSCI started to incorporate A-shares large cap into its MSCI Emerging Market indices last June. The index provider schedules to quadruple the weighing of A-shares constituents from the current 5% to 20% from May to November this year, including mid-cap Chinese companies.
The MSCI China A Index will evolve based on this A-shares inclusion process, and eventually comprise 421 Chinese companies upon the completion of the readjustment.
Charles Li, chief executive of the HKEX, comments that the 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".
Melody He, managing director and head of sales and product strategy of CSOP Asset Management, says whether investors will select A-shares ETFs and the MSCI A-shares futures to hedge their A-shares exposure is depended on the transaction cost.
"The flows for the index futures is in two directions - long and short. But if everyone wants to hedge their positions via shorting the index futures, it will create a discount for the contracts. It will then cost investors more to do the hedging," He says, noting that the cost of the futures will be determined by market sentiment.
Overall, she remains positive on the significance of the MSCI China A Index futures to the capital market.
Given that Singapore's FTSE A50 Index Futures is currently the only China index futures available for international investors, the MSCI China A futures will provide a different option to investors for risk management, she says.
Frederick Chu, head of ETFs at ChinaAMC (Hong Kong), says the MSCI A Index futures will be better than the FTSE A50 Index Futures in terms of sector coverages.
The representation of the MSCI A Index is relatively broad, covering various traditional and new economies in China including technologies and healthcare, while the FTSE China A50 Index mainly tracks financial and banking industries, Chu adds.
He believes investors are currently not enthusiastic to use ETFs for hedging due to the current A-share market rally at which the benchmark China CSI 300 Index surged as much as 30% year-to-date as of March 20.
International investors are seeking to take advantage of the rally via some broad-based China ETFs in Hong Kong, leading to a phenomenal growth for their capital flows.
The company's CSOP SZSE ChiNext ETF, which gauges the performance of small-and mid-sized innovative enterprise in China, recorded total inflows of HK$170 million (US$21.7 million) year-to-date as at March 12, boosting the fund's AUM to a record HK$560 million since its inception at 2015, Ms He says.
The ETF was also the top three best performing ETFs in February, alongside the CSI Caixin China New Economy ETF and the Haitong CSI300 Index ETF, according to the latest monthly report from the HKEX.
A-share ETFs performed the best in Hong Kong in February 2019, buoyed by optimism over a resolution to the US-instigated trade war and anticipation of MSCI's quadrupling of index weight in A-share large caps, the report states.
Hong Kong-listed ETFs and leveraged and invers products had HK$346 billion in market capitalisation at the end of February 2019, up 3% from the previous month.