China eyes new derivatives contracts to boost investor morale

Regulator announces futures and options products on mainland and HK, but there are doubts it will help

China is planning to launch a range of new derivatives contracts in a bid to shore up its ailing stock markets, but some market participants are sceptical about the effectiveness of the move.

The China Securities Regulatory Commission announced on Friday that it will launch options and futures contracts on the Shenzhen 100 index as well as an options contract for the existing exchange-traded funds on the small-cap CSI 1000 index to “better meet the risk management needs of investors”.

Immediately after the CSRC’s announcement, China Financial Futures Exchange released a draft proposal for Shenzhen 100 index-linked futures and options and is seeking public comment until August 24.

The CSRC also mentioned offering new derivative products in the Hong Kong market, including launching A-share index options and China government bond futures. Although the regulator didn’t specify which A-share index it is looking at, it is likely to be the MSCI A50 index as that is the only one listed on the Hong Kong Exchange.

HKEX had previously told Risk.net that it is in discussions with Hong Kong regulators about launching options contracts linked to the MSCI China A-share index. Currently, HKEX offers futures contracts linked to the MSCI China A-share index, though trading in them has been limited since their launch in 2021. The average daily trading volume dropped to 9,873 as of August 18 from 11,558 two years ago.

For the month of June, the total value of underlying shares traded in the Shenzhen 100 index was 1.9 trillion yuan ($260 billion), while 2.9 trillion yuan of the CSI 500 index was traded, and 4.8 trillion yuan of the CSI 300.

Limited impact

The move comes amid a period of difficulty in China’s equities markets, with its benchmark Shanghai Stock Composite index falling 6% over the past six months and the SZSE Component index down 13.27% over the same period.

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The head of over-the-counter equities trading at a Chinese securities firm welcomes the CSRC’s move, but doubts it will have the impact the regulator is hoping for.

“Offering derivatives contracts is part of a basket of policies to revive the current capital market as well as a diversification of the current equities index derivatives offering. It is difficult to achieve what the regulators want, but they have to try. The current issue is the lack of confidence in the market,” he adds.

The head of OTC equities trading also notes that the number of potential users for the new Shenzhen 100 products is limited, compared to those that can already access the equity derivatives market.

“Financial Institutions will definitely welcome the new product issuances as it provides new hedging tools and materials for product innovation, although the target audience is definitely smaller compared to the existing investors of CSI indices-based derivatives,” he says.

The Shenzhen 100 index is comprised of 100 companies listed on the Shenzhen Exchange. Compared with the CSI index, which contains mainly small-cap companies, the Shenzhen 100 has more large-cap issuers, including battery manufacturing giant Contemporary Amperex Technology and electric carmaker BYD.