Hong Kong is starting futures contracts that make it easier for international investors to bet on mainland Chinese stocks, intensifying the rivalry between the city's bourse and its Singapore counterpart.
Analysts expect that the new product, which launched yesterday from Hong Kong Exchanges and Clearing (HKEX), could take several years to gain traction, but it will ultimately provide formidable competition to the offering available from the Singapore Exchange (SGX).
While Singapore provides investors better liquidity, fewer holidays and a mature offshore derivatives ecosystem, Hong Kong has a stock trading link with mainland China and the underlying index the contracts will use has more balanced sector weightings, the analysts said.
With huge global demand for exposure to China's US$12 trillion (S$16.2 trillion) onshore equities market and Beijing cracking down on private enterprises ranging from the education industry to technology sector, there is increasing interest in the futures contracts to hedge risks.
There will be limited earnings boost for the Hong Kong bourse in the near term and greater earnings downside risk for SGX, Citigroup analyst Yafei Tian wrote in a note, saying the former looks better positioned in A-share derivatives in the longer term.
SGX shares slumped more than 4 per cent on Aug 23 after Hong Kong announced it would launch the futures built on an MSCI measure that gives access to 50 mainland stocks. HKEX soared almost 6 per cent that day.
"HKEX A50 futures will become the biggest offshore traded A-share equity futures product over the medium term," Goldman Sachs Group analysts wrote last month. While trading volume for MSCI index-based futures is typically "negligible" for the first two years, the new product may add about 5 per cent to HKEX's revenues by 2025, they said.
Singapore's A50 futures product, which tracks the FTSE China A50 Index, was launched in 2006 and had no direct competition. The futures accounted for about 10 per cent of SGX's total revenues and 29 per cent of derivatives revenue in the 2021 fiscal year ended June, Citigroup research shows.
With more customer demand for access to onshore China, FTSE Russell this week concluded a market consultation on potentially doubling the number of members of its China A50 Index to the 100 largest stocks by market capitalisation.
SGX has built its derivatives product on this gauge and an expansion of the index could pave the way for it to increase exposure to the market, said Mr Michael Syn, its head of equities.
The turnover of China's derivatives market versus cash equities is "still very, very low" and the offshore futures market compared with onshore is much smaller, leaving room for growth, he added.
Bloomberg Intelligence estimates that the futures could contribute 13 per cent to SGX's revenue by 2023 if overall offshore A-shares derivatives revenues grow by 22 per cent compounded annually.
SGX does not "shut down when a typhoon hits" and the design of the underlying index for the contracts is efficient and leads to low fees, Mr Syn said.
Trading costs could be a concern with the MSCI China A 50 Connect Index, which tracks some of the biggest mainland stocks from each sector, as the gauge uses several measures to balance out industry weighting. The FTSE measure includes the largest onshore shares weighted by market cap.
For the HKEX, the new futures contract offers a much more cost-effective alternative to existing China A-share hedging solutions, such as swaps and other listed A-share index derivatives, a spokesman at the bourse said in an e-mail, adding that the exchange "looks forward to continuing to develop Hong Kong's leading position as Asia's derivatives hub".