Trump ban on Chinese stocks sinks demand for index options in Hong Kong

Name: US-China relations: Joe Biden would approach China with more ‘regularity and normality’
Uploaded: 2021-04-29T08:30:12.000Z
Duration: 6 min 4 s
Description: US-China relations: Joe Biden would approach China with more ‘regularity and normality’

The Biden administration has not unwound its predecessor’s executive order against China Mobile, China Unicom, CNOOC and SMIC

Asset managers and banks are cutting H-share index option trades, which were notionally valued at US$1.4 trillion last year

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Trump’s ban on China Mobile, China Unicom, CNOOC and SMIC has made the entire HSCEI option series off limits for US entities and persons. Photo: AFP

Georgina Lee

Published: 4:30pm, 29 Apr 2021Updated: 5:36pm, 29 Apr 2021

The impact of a Trump administration executive order banning securities it said were linked to China’s military has lingered in Hong Kong.

Investors and banks dealing in options contracts referencing the Hang Seng China Enterprises Index (HSCEI) have been cutting exposure, which has depressed trading volume by 60 per cent since February.

“Traditionally, the HSCEI is the main index for many investors and fund managers to gain pure option exposure to China. With the several Chinese stocks that are index constituents entering into the US banned list, suddenly the index options market becomes off-limits to a subset of market participants,” said Govert Heijboer, co-chief investment officer of True Partner Capital, a hedge-fund manager focused on volatility as a trading strategy.

The deadline means that trading volume will continue to dwindle for the next seven months, market players said. If an alternative index that offers a US-compliant way to trade Chinese stocks is not found soon, the Hong Kong bourse may lose a valuable source of derivative trading income. Money managers sitting outside China could also lose an instrument which gives them exposure to the world’s second-biggest economy.

Options contracts that reference the so-called H-share index have been a popular product for bourse operator Hong Kong Exchanges and Clearing (HKEX). The contracts offer hedge-fund managers leveraged exposure to trade market volatility, and are also useful for asset managers hedging against risks in their China portfolios. Last year, the notional value of H-share index options traded totalled HK$11.1 trillion (US$1.4 trillion).

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US-China relations: Joe Biden would approach China with more ‘regularity and normality’

Trump announced his ban against China Mobile, China Unicom, oil and gas giant CNOOC and Semiconductor Manufacturing International Corporation (SMIC) in November and December, and the ban came into effect in January this year. All four companies are constituents of the H-share index. And unlike US index compilers such as MSCI, which dropped these stocks from their indexes in January, the Hang Seng Indexes Company did not respond to the US order.