Hong Kong ETPs Market

In February, large-cap HK/China equity market indices generally dropped by 5-8%. RQFII ETFs continued to record outflows of about USD 1,159 million, of which USD 979 million occurred to ETFs tracking FTSE China A50 Index. Hong Kong listed ETPs tracking HK-listed HK/China equity top names recorded capital flows in divergent pattern: the ones tracking Hang Seng Index recorded outflows of USD 384 million while those tracking Hang Seng China Enterprises Index recorded inflows of USD 222 million.

L&I products recorded net inflows of USD 61 million: the one recording biggest inflow is an inverse product tracking Hang Seng Index, while the one recording biggest outflow is a two-times leveraged product tracking Hang Seng Index, too. We notice that the index lost about 6% in the month.

Fixed-income/commodity ETPs also recorded small net outflow of USD 34 million.*

Offshore RQFII ETPs

Offshore RQFII ETPs recorded USD 1,353 million outflows in February.* The one with biggest inflow tracks MSCI China A Inclusion Index, reflecting the market’s expectation for the forthcoming MSCI’s inclusion of China A-shares to its EM index and China index from June this year.^

Investment Strategy & Outlook

The industry is in hot discussion now about the consequences of this MSCI’s inclusion of China A-shares to its EM and China indices. We believe that both domestic and overseas investors will benefit from the inclusion. Given the low correlation of China A-shares market with other equity markets, overseas investors will enjoy more diversification benefits after the inclusion. For instance, MSCI China Index’s correlation with MSCI World Index is expected to drop from historical level of about 80% to around 60% after A-shares inclusion. For domestic investors, by introducing more participation of foreign institutional investors the market structure might change and volatility of the market might get stabilized.

At the same time we would expect more ETFs tracking MSCI China A Index series to be launched onshore; while offshore ETFs will be more focused on meeting overseas investors’ asset allocation needs of A-share market.

*Data is as of 28 February 2018 from Bloomberg
^ The index is designed to track the progressive partial inclusion of A-shares in the MSCI Emerging Markets Index

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