The recent collapse in the Chinese A-shares market has hit the issuance of structured products linked to the CSI 300 index, which has fallen by 37% in July with market players pointing out that the fluctuation of the stockmarket has made it difficult to hedge these products.
Last month, 27 products linked to the CSI 300 were marketed in China compared with 43 products issued in May. The gap seems to have been filled with gold-linked products, which became the most popular underlying in June.
Although the CSI 300 has dropped significantly over the last week, there is still demand from investors for CSI 300-linked products, especially those with a bearish structure, said Zijie Pan, a product manager from Agricultural Bank of China. “The problem we are having right now is finding a counterparty that can hedge for us,” said Pan. “The regulator is keeping an eye on the short-selling of CSI 300 futures and such trading is under strict control.”
The China Securities Regulatory Commission (CSRC) is in the process of probing CSI 300 futures short-selling volumes and accounts as a way to curb market manipulation and to slow down the bearish trend of A-shares, according to a CSRC statement.
Investors are still interested in CSI 300-linked products because, unlike direct investments in the stockmarket, they have a lower risk, which is why Agricultural Bank of China is offering CSI 300-linked products with either capped call or capped put features to add a sense of security, said Pan. “We are also planning to introduce products with different underlyings, such as interest rates and foreign equities, to provide our investors alternatives to the CSI 300.”
Although there are banks that want to hedge, it is difficult to do this in the current environment, said Guoqiang Wang, portfolio manager at Shenwan Hongyuan Securities. “The stockmarket these days is behaving abnormally and the fluctuation has made the pricing of either CSI 300 futures or over-the-counter CSI 300 options more expensive, thus our deals don’t seem as attractive as before,” said Wang.
However, the CSI 300 index will remain the most popular underlyings for structured products in China as the hedging cost of the index is still quite low compared with other underlyings, said Wang.
Agricultural Bank of China has reduced the issuance of CSI 300 index-linked products this month, according to SRP data. There were nine products linked to the index in June and issuance has dropped 36% compared with the previous month.
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