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China Equity Indices

September 2021

Accessing Chinese equity indices

Over the past month or so there has been an increased focus on Chinese equity markets, largely due to regulatory announcements that seem to target specific industries and sectors. The recent announcement involving the education sector caused Chinese equities to fall sharply and has brought renewed attention to the many Chinese equity indices available. We take a deeper look into these indices and how they behave relative to each other.

Comparing Chinese equity indices

There are many indices that aim to measure the performance of Chinese equities. Chinese equities are typically split up into three categories:

  • A-shares: companies that are incorporated in China and trade on the Shanghai and Shenzhen exchanges
  • H-shares: companies that are incorporated in China and trade on the Hong Kong exchange
  • ADRs / foreign listings: companies listed in the US or other countries directly or as an ADR

This chart highlights the differences across different indices, both in terms of market capitalisation captured as well as the types of shares included in the index. The composition of the index has a significant effect on pricing on these indices. Due to structural factors onshore, it is very expensive to go short A-shares. This can be seen through total return swap pricing on these indices to go short. This also corresponds to a structural outperformance spread to go long China synthetically.

The factors driving this pricing also impact the forwards of these indices. This makes hedging via options also punitively expensive, since true ‘ATM strikes’ are actually far below current spot levels. High levels of volatility in Chinese equities also increase the cost of hedging.

To further compare the indices, we now consider how they behave alongside one another. We can see that the indices that capture A-Shares appear to move in a much more similar way compared to HSCEI, which only captures H-shares.

The table below shows the correlation between indices. The upper diagonal shows the correlation of daily returns for the entire period, while the lower diagonal shows the correlation during stress periods, which we define as a combination of both the Q4 2018 and COVID sell-offs.

The correlation table suggests a high correlation between the indices that include A-Shares, and a moderate correlation with HSCEI. During stress periods, the correlation between A-share indices appears to remain quite high. However, HSCEI correlations break down during these periods, particularly with the CSI 300 and MSCI China A-Shares.

For those looking for an accessible short China exposure, MSCI China benefits from cheaper funding and a stable stress correlation. For those looking to get long, MSCI China-A provides benchmark exposure with a sizable outperformance spread.

The Solutions Team

The Solutions team provides derivative overlay and risk management fiduciary services to Asset Owners and Managers in Australia. Our goal is to provide asset owners and managers with an experienced overlay advisory and execution service to improve portfolio outcomes and cost efficiency.

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