EQD Research

Exposure To China Stocks When China Is Closed

Nov 2, 2021

This independent content is made possible by SGX

By Russell Rhoads,
head of research

Each Wednesday morning I co-host Stocks and Jocks, a radio show in Chicago that has a very loyal following for traders and sports enthusiasts. Recently we were running down what markets were doing around the world and my co-host host noted that Chinese stock markets were closed and he opined about where that market would be upon reopening.

My response was to check the FTSE China A50 Index Futures that trade at SGX to get a clue as to what traders think regarding where Chinese stocks will open when the cash market goes live again a couple days later. SGX makes an effort to provide market access regardless of the holiday. In fact, over the past two years the exchange has only closed twice for holidays, New Year’s Day 2020 and 2021. SGX takes the “money never sleeps” saying very seriously. This is particularly useful for markets that may be closed, but have equity index futures listed on their market.

The radio discussion occurred on Wednesday Oct. 6 and the stock market in China had not been open since September 30. It reopened on Friday Oct. 8 after a full week of being dark. During this time-period, with the underlying market closed, the futures trading at SGX covered about 580 points or a high to low range of about 4% (see Chart 1).

Chart 1 – SGX FTSE A50 Futures 10 Minutes Chart Oct 1 to Oct 7

Data Source: Bloomberg

Considering the stocks that comprise the FTSE China A50 index were not trading, this is some pretty health price action. Also, average daily volume for these five trading days came in just over 117,000 contracts. This figure is a fraction of the normal daily volume, frequently in the 300,000 to 500,000 range depending on market conditions. This six figure average daily volume compares favorably to the recently launched MSCI China A 50 Connect (USD) Index Futures that trade at the Hong Kong Exchange. New contracts tend to take time to gain traction, but as of Oct. 22 the volume for the MSCI China A 50 Connect futures is yet to top 7,000 contracts.

Not only is the volume stronger with the SGX contract, but the exchange being in a more neutral trading venue that is outside the uncertainty associated with U.S. – China relations may offer a bit comfort for those concerned about political issues dividing these two countries. Another difference between the two is that the Chinese financial markets do have periodic extended holidays. As traders in the US know, by law the markets are not allowed to be closed more than three consecutive days, hence the post-Thanksgiving Day only the junior traders show up session in late November each year. However, other parts of the world experience extended holidays where the financial markets close for several consecutive days and China is definitely one of these countries that likes their long holidays. On the other end of the holiday spectrum is SGX, where the market is open practically every business day of the year.

No one can predict with certainty what is going to happen in the financial markets and the same may be said for the continuing geopolitical tensions between China and other developed countries. One certainty is that there will be periodic periods of volatility and uncertainty associated with investing in mainland China. Luckily, there is a market open for trading, regardless of the holiday calendar in China, that allows investors and traders the ability to manage risk associated with investing in China.