New hedging tools needed for Shanghai-Hong Kong stock link
Cross-border trading scheme's lack of options to smooth volatility is discouraging institutional money managers from greater involvement
A lack of hedging options to smooth volatility for investors buying mainland shares is holding back institutional money managers from fully exploiting the Shanghai-Hong Kong Stock Connect trading scheme, industry insiders say.
The need will become even more pressing with the extension of cross-border stock trading to Shenzhen, expected this year, especially if it eventually includes Shenzhen's tech-heavy, Nasdaq-style ChiNext board, which is even more volatile than the city's main board.
Market participants are keen to have an overseas stock-index futures market that provides ample trading liquidity and covers small-cap stocks, as they worry that domestic retail investors might flood out of the mainland stock markets in the event of a sharp downturn.
The launch of stock-index derivatives or other means to hedge against downside risk is the next step in encouraging investment through the stock connect scheme, after the Hong Kong stock exchange moved last month to ease concerns over a pre-trade checking requirement that could have exposed sell orders.
Hong Kong Exchanges and Clearing chief executive Charles Li Xiaojia said in February that he hoped to see the licensing of futures for northbound investors this year.
Yin Zhong-li, a researcher at the Chinese Academy of Social Sciences, said adding Shenzhen-traded technology and small-cap companies to the extension of the stock connect scheme would be another major achievement in Beijing's efforts to reform the mainland's capital markets. He said the stock connect scheme could help contain the bubble in Shenzhen's ChiNext market, which is trading at valuations five times higher than Hong Kong small-caps.