Taking Exposure to China

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Despite a gruelling meltdown in July, the FTSE China A50 Index is up 40% on a yearly basis (21 November 2014 -20 November 2015).

For investors staring into years of single-digit growth, such returns should be alluring. However, entering the Chinese equity markets could be perplexing for the average foreign market participants.

Currently, foreign investors hoping to participate in China’s equity markets could invest through the Shanghai-Hong Kong Stock Connect or through the Qualified Foreign Institutional Investor (QFII) scheme.

The QFII scheme permits foreign firms to invest into the Chinese “A” share market and enables inflows of capital into the renminbi while under the Shanghai-Hong Kong Stock Connect, individual investors could purchase mainland shares through Hong Kong.

Notwithstanding the complexities of the two schemes, both arrangements also suffer from a quota system that could hinder effective hedging and execution of trading strategies.

Another alternative is gaining exposure through offshore futures.

Launched in 2006, the Singapore Exchange’s (SGX) FTSE China A50 Index Futures contract tracks the FTSE China A50 index, which comprises the 50 largest “A” share companies traded on the Shanghai and Shenzhen markets.

Being an offshore future, the SGX FTSE China A50 Index Futures contract provides similar exposure to the Chinese market without the limitation of a quota system.

Another advantage of the SGX FTSE China A50 Futures is trading hours.  Featuring 16.5 hours of extended trading, spanning Asian, European and US time zones, the SGX FTSE China A50 Index Futures is an ideal instrument for market participants to respond to news and to manage their exposure to Chinese equities during periods of elevated volatility.

The contracts are available from 09:00 until 16:00 (local time) with a pre-open and post-close sessions. This is followed by a T+1 session from 16:40 until 02:00 (following day) giving maximum time to open and close positions. The SGX FTSE China A50 Index Futures is a convenient instrument for market participants to respond to off-market news and to manage their exposure amid heightened volatility. Bid and offer spread averaged around 2.5 basis points during onshore trading hours.

Taking a position in response to off-market news is an instance of the applicability of the SGX FTSE China A50 Index Futures. On 23 October, China stepped up monetary easing with its sixth interest rate cut in a year to cushion a slowing economy as well as to battle deflationary pressure. The one-year lending rate would be cut to 4.35% from 4.6% effective 24 October, the People Bank of China (PBoC) announced on its website after the cash market closed, while the one-year deposit rate will fall to 1.5% from 1.75%.

Accordingly, traders took advantage of the extended trading hours of the contract to manage their exposure.

The SGX FTSE China A50 contracts cover the two nearest serial months plus March, June, September and December months on a 1-year cycle. The contract size is US$1 x SGX FTSE China A50 Index Futures Price, which as of 23 October was approximately US$10,580. 

Like any other futures contract, the SGX FTSE China A50 Index Future is margined. The current initial margin amount is $1,595 per lot (23 November 2015), which could edge higher in tandem with spikes in volatility.

In 2015, investors’ interest in China took off, with the SGX FTSE China A50 Index Futures turning over between 500,000 and 700,000 lots per day leading up to the July 8th market event.  On July 8th, the Shanghai Composite index fell to a low of around 3,421.53 leading to a series of intervention by the Chinese authorities to stabilise the market.

Users of the futures contract are always protected by margining at SGX but also price limits to cover unexpected volatility and position limits to cap an individual investor’s share of the market.

In summary, the FTSE China A50 contracts at SGX:

  • Are available to international investors.
  • Based on a premium benchmark Chinese A-share index tracked by international offshore institutional investors.
  • Provide more than 16 hours of trading.

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