H-share futures make respectable debut

Not a repeat of the red-chip futures debacle, brokers say.

Yesterday (Monday) saw the debut of the Hong Kong Futures Exchange's H-share futures contract, in which 1,367 December contracts switched hands. Brokers believe this is a respectable start and expect the contract to see volumes of 10-15% of the Hang Seng Index by the end of the week. Yesterday, 20,813 December futures contracts on the HSI traded.

Hedge funds are likely to be the biggest players in the new market, which makes it easier and cheaper to short H shares than buying the basket of stocks.

Although in 1998 the HKFE introduced a red-chip futures contract that was a flop (it remains listed but is not traded anymore), brokers have bigger expectations for the new Hang Seng China Enterprises (H shares) Index.

John Chung Lee, head of research at KE Absolute in Hong Kong, explains the red-chip index was dominated by one stock, China Mobile, which accounted for 51% of the weighting. The fifth-biggest stock was Legend, with a mere 2.7% weighting. Fund managers could simply trade China Mobile and one or two other stocks and easily replicate the index.

That's not the case with the H-share index, he says. The biggest constituent, PetroChina, comprises only 21% - a situation similar to HSBC's role in the HSI. Sinopec is the other giant, at 16.9%. The futures market for the Hang Seng is very liquid, because given the diverse constituency, it is an effective hedging tool. Brokers hope the new index to follow suit.

Other big names among the 32 constituents include China Telecom (8.4%), Huaneng Power (7.4%) and Aluminum Corporation (4.6%). The value of one contract as of 28 November is HK$182.500 and, like the HSI Futures, available months are the spot month, the next calendar month and the quarters.

Lee believes the concept of H shares is also easier to grasp. H shares are issued by mainland-based companies and enjoy equal legal value to A shares. Red chips are actually Hong Kong-incorporated companies with the majority of their business in China - a concept that today could apply to most "Hong Kong" companies, including many in the HSI.

Brokers also hail the timing of the new product, which should capitalize on the booming IPO market for Chinese names. H-share companies have raised over HK$150 billion ($19.3 billion) via IPOs since 1993.

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