Published On: Sat, Apr 6th, 2013

Flourishing Growth of China A-Share Access Products

Michael Syn, Head of Derivatives at SGX

Michael Syn, Head of Derivatives at SGX

The marketplace for China A-Share products is flourishing, with demand from the Asian region experiencing strong growth. In the three months since December 2012, six new China A-Share funds were launched in key Asian markets including Korea, Japan and Hong Kong.

In 2012, Exchange Traded Funds (ETFs) tracking the China A-Share market saw some of the largest inflows of any ETF sector. Total assets under management (AUM) has more than doubled over the past two years, growing from US$9.5 billion in December 2010 to over US$20 billion in December 2012. According to iShares, the leading global ETF issuer, six of the fifteen most successful new passive product launches during the year were A-share trackers, with investors allocating US$25 billion into China-related ETFs, second only to US-related funds.

SGX FTSE China A50 Index Futures, as the most liquid offshore A-share product, saw even stronger growth, with a three-fold increase in its open interest. Strong growth in open interest rollover was observed particularly during the European and US trading hours, due to the continuous overnight liquidity provided by SGX FTSE China A50 Index Futures after China’s domestic A-Share market has closed.

Intensifying Interest in China’s A-Share Market

In the first two months of 2013, the two key A-Share benchmarks of CSI300 (domestically distributed) and FTSE China A50 (internationally distributed) saw 5.5% and 6.0% increase respectively. This market performance was generally considered to be driven by factors idiosyncratic to China’s macroeconomics, and has attracted a renewed surge of foreign investor participation in Chinese equities through both active and passive mandates.

Chinese GDP expansion remains on track to outpace that of other G7 economies in 2013. Recent positive economic data releases in exports, industrial production and retail sales growth have been supportive of the continuing performance of China-linked equity markets, whether H-share, red-chip or the mother A-share market itself.

Underpinning the intensifying interest by global investors is the accelerated programme by the Chinese government to attract structural foreign fund inflows, with the objective of improving market confidence and promoting sustained deepening of the Chinese capital markets. The QFII and RQFII programmes has expanded multifold, as the Chinese authorities ease capital controls to attract global investment into the previously quiescent mainland equity market, in preparation for a growing pipeline of hundreds of Chinese corporates seeking public flotation.

The recent expansion of QFII and RQFII quotas and relaxation in usage restrictions have given rise to the rapid proliferation of China A-share access products for foreign investor usage. The product range has expanded from synthetic and physically-backed ETFs to leveraged fund structures, as well as SGX’s uniquely liquid China A50 Index Futures which are the world’s only offshore futures tracking the A-share market.

Evolution of Offshore China A-Share Access Products

The FTSE China A50 Index represents the 50 largest A-Share companies by market capitalisation, adjusted for liquidity and tradability. The combined assets of ETFs benchmarked to the FTSE China A50 Index have surpassed the US$10 billion mark, while outstanding open positions in the SGX FTSE China A50 Index Futures amounts to over US$5.5 billion, making FTSE China A50 index the most liquid investable index for offshore investment and risk managers.

As more innovative A-share products are created, the opportunities for arbitrage between diverse return horizons and investor interests have also expanded. Market-makers, CTAs and relative value managers actively manage multiple arbitrage opportunities between A-share baskets, ETFs and the futures listed within China and on SGX, as well as secondary H-share China products.

“Liquidity in offshore China A-share products like the SGX FTSE China A50 Index Futures and the QFII/RQFII ETFs has grown significantly in recent months. As this diverse, growing and still-young marketplace matures, there remain ample arbitrage opportunities in Chinese equities, given the sheer size and liquidity of the domestic marketplace and its underlying volatility”, said Mr Marty Sun, Director in the Emerging Markets Equities Trading Desk of Credit Suisse.

“Earlier this year, we launched the first China A-share Leveraged Fund in Korea. The fund tracks the FTSE China A50 Index, but amplifies the underlying index by 1.5 times by utilising the liquid position management tool offered by SGX’s A50 futures. The fund has proven with popular with Korean retail and institutional investors. Daily turnover has grown by 3-5% to USD 35 million since its launch. This growth rate is significant, as it has been accomplished in only 2 months”, said Mr Lee Chunju, senior fund manager at Samsung Asset Management.

According to both MSCI and FTSE, China A-shares may be more fully incorporated into their benchmark indices within three years, which will result in significantly greater asset allocation by global fund managers weighting their portfolios into Chinese equities.

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