Hong Kong exchange pins hopes on China index futures in bear market

The Hong Kong exchange’s Hang Seng Index has dropped 20% from a peak in mid-February, hampered by Beijing’s moves to rein in the technology sector.   © AP

NARAYANAN SOMASUNDARAM, Nikkei Asia chief banking and financial correspondent | Hong Kong

HONG KONG — Hong Kong’s stock exchange on Friday was cleared to launch a new revenue source, even as worries over China’s data privacy rules pushed the city’s benchmark into bear market territory.

Futures contracts based on the MSCI China A 50 Connect Index will be the Hong Kong exchange operator’s first derivative product founded on mainland shares. It debuts Oct. 18, according to a statement.

The exchange hopes the product will boost trading volumes. Hong Kong looks to maintain its prominence as an Asian financial hub while Beijing tightens its grip on the former British territory.

The product “underpins Hong Kong’s attractiveness and vibrancy as a deep and liquid diversified international marketplace demonstrating our pivotal role in connecting China and the world,” Hong Kong Exchanges and Clearing (HKEX) CEO Nicolas Aguzin said. “It will facilitate the introduction of a wide range of derivatives on our existing platform.”

Aguzin compared the milestone to the start of the Stock Connect scheme seven years ago that linked Hong Kong’s bourse with its Shanghai and Shenzhen peers. It allows global investors to trade in select mainland shares from the city and Chinese investors to buy stocks in Hong Kong.

The scheme contributed 12% of the exchange’s revenue in the first six months of the year, compared with under 2% in 2016, filings show.

The exchange is counting on derivatives products to diversify revenue away from fees generated via stock trading and initial public offerings. Last year it secured the rights to offer 37 futures and options contracts based on MSCI’s Asian and emerging-market equity indexes, ousting previous holder Singapore Exchange. The business alone contributed one-third of its rival’s revenue then.

MSCI and HKEX first agreed to issue mainland-traded A share futures back in 2019 but could not launch a product as they awaited approval from regulators in the city and Beijing. That approval has now been received.

The exchange’s core business of stock trading is being buffeted by China’s moves to rein in its technology sector —home to issues like Alibaba Group Holding and Meituan that are components of Hong Kong’s benchmark index.

On Friday, the Hang Seng Index fell 1.8%, brining losses from a mid-February peak to more than 20%, the threshold for a bear market. Alibaba’s Hong Kong shares fell more than 2.5%, while Meituan dropped 4.5%.

Beijing’s enactment of a new data privacy law on Friday was the latest salvo in China’s monthslong crackdown on the technology sector. Few details were announced on the law, but investors saw it in the context of rising pressure on tech platforms.

Past moves slapped Alibaba with a record fine, derailed fintech startup Ant Group’s potentially record-breaking IPO at the last minute, and clamped down on offshore listings, wiping away over $1 trillion from Chinese stock values.

The Hong Kong exchange’s daily trading volumes are dominated by new-economy companies. Since HKEX boosted the weight of technology stocks in the benchmark last year, the regulatory clampdown is starting to impact the exchange.

Average daily trading volume on the HKEX fell to 151.3 billion Hong Kong dollars ($19.4 billion) in the April-June quarter from the record HK$224.4 billion during the first three months of the year.

The exchange has seen only three share offerings debut this month, with another one scheduled next week. This dip follows record volumes in the first seven months of 2021. No other offerings are open for subscription.

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