The Financial Services Development Council has recommended the listing of structured products linked to the Stock Connect’s A-share or A-share-based indices in Hong Kong to strengthen the city’s role as the region’s leading offshore renminbi finance center.
By endowing financial derivative products, such as warrants linked to the onshore A-share market, the first phase of the move will give international investors risk management tools to hedge their investment portfolio positions in the A-share market, and inject liquidity into the domestic equity market.
When the market has accumulated sufficient experience and understanding of Hong Kong-listed structured products linked to Stock Connect A-shares, and mainland regulators are confident in allowing mainland investors to participate, the FSDC would propose the second phase. The later phase would expand the scope of eligible securities, including Hong Kong-listed structured products linked to a selected list of eligible underlying assets, and gradually allow mainland investors to purchase such products.
The introduction of A-share structured products could increase northbound Stock Connect’s projected value by about 4.9 percent, add liquidity to the mainland’s futures market by 15.8 percent, and raise the projected investment in the A-share market by up to 38 billion yuan billion annually, according to the FSDC report released on Wednesday.
“Our listed structured products market is also characterized by its sound regulatory regime, mature market participants and transparent disclosure of product information, which can be further utilized to enhance the access of global investors to the A-share market, and accumulate experience in the process to support high-quality development of that market,” said FSDC Chairman Laurence Li.
As of March 31, the Shanghai Stock Exchange and the Shenzhen Stock Exchange were the world’s fourth and seventh-largest stock exchanges by market capitalization, with $4.7 trillion (33 trillion yuan) and $3.3 trillion (23 trillion yuan) in capitalization, respectively.
Despite the sheer size of the mainland’s onshore stock market, the only derivative trading instruments with A-shares available to mainland retail investors are stock index futures and options, as well as ETF options. The mainland’s equity market has room for further development compared to other leading international equity markets in this respect.
The average daily turnover of derivative warrants and callable bull/bear contracts amounted to HK$17.9 billion ($2.29 billion) last year, accounting for 20.6 percent of the city’s equity market’s total market turnover. With a vibrant derivative market, Hong Kong can expand access to the A-share market through listed derivatives and structured products.
