Trading E-mini FTSE China H50 Index Futures

In recent months, CME Group's E-mini FTSE China H50 Index futures have seen a spark of fresh activity, with open interest on a slow, but steady increase since June. The FTSE China 50 Index, along with other Chinese equity indices, will likely see renewed activity as lockdowns return in some Asian countries, once again disrupting the resumption of “normal” operations.  

CME Group E-mini FTSE China H50 Futures Recent Average Daily Volume (ADV) and Open Interest (OI)

Data as of September 1, 2021. Data Source: CME Group.

The FTSE China 50 Index, along with a large number of constituents in the financial, construction, and energy industries, provides a comprehensive selection of companies whose operations will likely be impacted by the continued presence of COVID-19. As a result, various opportunities might present themselves as APAC and the rest of the world grapple with the pandemic and its lasting effects.

Launched nearly six years ago, E-mini FTSE China H50 Index futures continue to be a resource for investors looking to hedge China and Hong Kong market exposure, particularly amidst ongoing global volatility.

Features of trading E-mini FTSE China H50 Index futures

As with all CME Group Equity Index futures contracts, trading is available nearly 24 hours a day on CME Globex, and cross-margining benefits and capital efficiencies may exist when trading through the Exchange’s central clearinghouse. Furthermore, the contract allows for Basis Trade at Index Close (“BTIC”) transactions, meaning the futures can be traded at a fixed spread to the closing value of the FTSE China 50 Index.

In November 2020 CME Group and the Singapore Exchange (SGX) expanded their Mutual Offset System (MOS) to include E-mini FTSE China H50 Index futures. The MOS enables traders to open a futures position on one exchange and liquidate it on the other exchange, creating an expanded and unified marketplace around the clock and across the globe. This unique clearing link between CME and SGX has been actively used by market participants since its inception in 1984, and Nikkei 225 futures have transacted more than 65M contracts since its inclusion. The recent addition of E-mini FTSE China H50 Index futures provides traders greater opportunity to utilize the MOS while gaining exposure to the Chinese and Hong Kong stock markets.

Lastly, the FTSE China 50 Index is closely correlated with other Hong Kong indices, which will be described in more detail in the next section.

How the FTSE China 50 Index stacks up to other Chinese indices

Along with the FTSE China 50 Index, other Chinese benchmarks include the FTSE China A-50 Index and the CSI 300, as well as the Hang Seng Index and the Hang Seng China Enterprise Index (HSCEI) in Hong Kong. There are key similarities between the FTSE China 50 Index and the indices listed above; however, and perhaps more importantly, there are clear differences investors should understand.

The FTSE China 50 Index is comprised of the 50 largest and most liquid Chinese stocks listed and traded on the Hong Kong Exchange. These Chinese stocks are either H-Shares, Red Chips, or P Chips ‒ which are common stocks or tranches of common stocks of Chinese companies listed in Hong Kong. These stocks are quoted in Hong Kong dollars (HKD).

The FTSE China A-50 Index, however, measures the performance of China’s A-share market in Shanghai and Shenzhen. These A-shares are quoted in Chinese yuan (CNY). The distinction between the A- and H-share markets is important, as they function separately from one another. For instance, trading in H-shares is permissible to any investor, whereas investors looking to trade Chinese A-shares in the FTSE China A-50 Index or the CSI 300 still encounter restrictions1 to gain access in mainland China markets despite the enhancements made through Stock Connect between the stock exchanges in China and Hong Kong.

The divergence of the FTSE China 50 Index and the A-share indices is further illustrated in the correlation matrix below. For instance, the correlation between FTSE China 50 and both FTSE China A-50 and CSI 300 is 0.67 and 0.66, respectively. The correlation between FTSE China A-50 and CSI 300 is 0.95, strengthening the divergence between the A- and H-share markets.

On the other hand, the FTSE China 50 Index is closely tied to its Hong Kong counterparts, the Hang Seng Index and the HSCEI, as illustrated by the correlations of 0.95 and 0.98, respectively. These three indices target the same market, so it is understandable why they are highly correlated.

Rolling 60-day Correlation Between Indices

Data as of August 9, 2021. Data Sources: Bloomberg, CME Group.

With its unique composition of China-incorporated stocks listed in Hong Kong, FTSE China 50 is an index that bridges the gap between Chinese and Hong Kong markets. The interconnectedness of FTSE China 50 with its counterparts described above implies futures tied to the FTSE China 50 Index are an efficient way to gain exposure to both Chinese and Hong Kong markets.

Correlation Matrix

 

FTSE China 50

FTSE China A-50

CSI 300

Hang Seng

HSCEI

FTSE China 50

1.00

       

FTSE China A50

0.67

1.00

     

CSI 300

0.66

0.95

1.00

   

Hang Seng

0.95

   

1.00

 

HSCEI

0.98

   

0.95

1.00

Historical correlation based on data from August 9, 2016 to August 9, 2021. Data source: Bloomberg.

The similarities between the Hong Kong indices are further shown in the table below with the overlap of constituents in the FTSE China 50 and the HSCEI up to 31 out of a total of 50. Interestingly, the FTSE China 50 and the FTSE China A-50 have 20 of the same constituents; however, the correlation between these two indices indicates that they behave quite differently despite their similar makeup.

Index Constituent Comparisons

Common Constituents

By Count

By Weight

FTSE China 50

FTSE China A-50

20 of 50

20 of 50

~38%

~37%

FTSE China 50

Hang Seng

22 of 50

22 of 50

~71%

~52%

FTSE China 50

HSCEI

31 of 50

31 of 50

~82%

~77%

Data as of August 9, 2021. Data Source: Bloomberg.

All in all, E-mini FTSE China H50 Index futures provide accessibility to both markets ‒ depending on a trader’s needs and strategy.   

About E-mini FTSE China H50 Index futures

The index futures are listed on CME and trade on the CME Group electronic trading platform CME Globex as well as CME ClearPort for block trades, offering around the clock trading.

The E-mini FTSE China H50 Index futures contract has a USD $2 multiplier and is settled to the official closing index value of the FTSE China 50 Index. Additional contract information can be found in the product’s specification table.

In November 2020, CME Group amended the contract by changing the listing cycle and minimum price increment to align with a similar contract listed on the SGX2, making the contract easier to trade. With the simultaneous MOS expansion, E-mini FTSE China H50 Index futures are now easier to trade than ever.

For more information on how to trade, please visit www.cmegroup.com.

References

  1. Individuals can consult their investment counsel for more information about direct cash equity market access in China.
  2. SGX’s contract is titled FTSE China H50 Index futures, more information can be found here: https://www.sgx.com/derivatives/products/chinah50?cc=FCH

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