CSI – market value, liquidity take CSI 500 to the top

China Securities Index Company (CSI) is the provider of the CSI 300 index and the CSI Smallcap 500, two of the most popular underlyings in the Chinese market.

SRP data shows that the CSI 300 index has been featured as a single index across 470 products worth US$12.3 billion between 2021 and 2022. The CSI 300 is also included as the underlying in 567 live products worth an estimated US$2.2 billion.

The CSI Smallcap 500 featured in more than 1,800 products with combined sales of US$32.9 billion during the reporting period. Of these, 711 (US$11.3 billion) are live products (as of 15 May 2023).

In October 2014 the Chinese index provider introduced the CSI 1000 Index, which is comprised of 1,000 small and liquid stocks of all A-shares, excluding the CSI 800 constituents. Of the 63 products launched linked to the CSI 1000 index worth an estimated US$ 988 million 59 are live products (US$926m).

Equity index investment is at a stage of rapid development in China driven by broad-based indices, according to Jin Di, executive director, sales & marketing at China Securities Index.

“As the market value and liquidity of the CSI 500 constituent stocks continue to rise, investors have greater need to hedge the medium and small market cap constituent stocks,” he told SRP.

“The CSI 500 option provides various hedging methods in view of the backwardation of the CSI 500 index futures.”

The CSI 1000 has gained noticeable traction as a result of the listings of its futures and options in July 2022. China Merchants Bank issued 63 structured deposits tracking the index with a tenor from one to three years during April and May, SRP data shows.

CIS market cap indices - sales and issuance 2021-2022

In addition to the CSI 1000 options and futures, the CSI 500 ETF options and SSE 50 options, which also went live in 2022, have “received wide attention” from the market, according to Jin.

The launches have helped form “a relatively complete risk management system” across large, medium and small-cap Chinese stocks.

Beyond broad-based indices, CSI has several industry sector and custom indices focused on equity used in structured products including the CSI Banks Index, CSI Photovoltaic Industry Index, CSI National Defence Industry Index, CSI Hong Kong 3 Index and CSI CITIC Multi-asset Trend Index.

In the past year, we’ve launched a series of customized indices, which are mainly in equity indices but also include two multi-asset indices – the CSI Haitong ESG Equity and Bond Coordinated Index and CSI Haitong Multi-Asset Dynamic Allocation Index,’ said Jin.

To improve the customisation efficiency, CSI is setting up a client service platform and an index R&D platform.

“Nowadays, the indexes customised by institutional investors primarily focus on specific investment scopes and sectors, such as regional indexes where the constituent stocks are listed in a certain region,” said Jin.

According to Jin, there has been a growth in the thematic index space, particularly in technological innovation, ESG and central government-owned enterprises since 2022. The demand is driven by national initiatives including the carbon neutral strategy, the establishment of a valuation system with Chinese characteristics and a registration-based IPO system.

“Short-term fixed income indices recently have become more popular among investors with low to medium risk appetite, featuring interbank negotiable certificates of deposit indices and commercial paper indices,” he added.

What requests are you getting from derivatives desks in China year-to-date?

The CSI 1000 index futures, CSI 500 ETF options, SSE 50 index options, and CSI 1000 index options, which went live in 2022, have received wide attention from the market. In Q1 23, the respective number of contracts traded on the CSI 1000 index futures, CSI 1000 index options, China Southern CSI 500 ETF options and Harvest CSI 500 ETF options reached 3.0 million, 3.3 million, 2.0 million, 30.8 million and 6.3 million.

As the government aims to develop a multi-layer capital market in China, investors’ demand for derivatives linked to medium-tosmall market cap stocks and sectors is expected to keep rising. In addition to equity-linked derivatives, investment demand for fixed income-linked derivatives has also increased. On 21 April, the 30-year central government bond (CGB) futures went listed on the China Financial Futures Exchange, acting as an effective tool for ultra-long-term interest rate risk management.

What new indices are gaining traction in China?

Since 2019, the Chinese derivatives market has been developing steadily with wider variety of products being introduced. New derivatives tied to the SSE 50 Index, CSI 500 Index, CSI 1000 Index and ChiNext Index or their ETFs went live in 2022.

We trust that the introduction of index derivatives can help improve the multi-layer capital market and promote its sustainable development. Therefore, it’s critical for index derivatives to optimize the efficiency of resource allocation and market price discovery as well as to enhance the market liquidity and act as effective risk management tools. At present, customized indices are still in the nascent stage of development and have insignificant presence in the derivatives space. Their AuM and trading volume are much smaller than that of broad-based indices. However, we’re very hopeful about the growth.

Index customisation is an important service for CSI. We’ve been working to optimise the processes involving the receipt of clients’ request and the assessment of their demands and index development as well as release. We’re also in the process of setting up a client service platform and an index R&D platform to improve the customisation efficiency. Nowadays, the indexes customised by institutional investors primarily focus on specific investment scopes and sectors, such as regional indexes where the constituent stocks are listed in a certain region. The indices may also be designed to reflect the individualised strategies by deploying the multifactor stock selection method as specified by the investors. Besides, some indices feature unique methods, such as the selection of stock constituents, weighting or calculation.

How does the demand for CSI indices differ onshore vs. offshore in the derivatives market?

In the OTC market, the demand from onshore investors is more diversified in terms of asset class – from stock indices, bond indices to multi-asset indices. Meanwhile, the demand from offshore investors is concentrated in the CSI 300, CSI 500 and CSI 1000. There’re more structured products tracking CSI indices traded onshore than offshore. So far, we have not observed any obvious change in the demand for the CSI indices in the onshore derivatives market, but we’ve noticed that more clients started to pay attention to the CSI 1000 Index.

Why has the CSI 500 such a dominant position as underlier in the Chinese derivatives market?

As the market value and liquidity of the CSI 500 constituent stocks continue to rise, investors have greater need to hedge the medium and small market cap constituent stocks. Additionally, hedging is in great demand for institutional investors amid higher market volatility for a few reasons.

First, CSI 300 options hardly allow investors to properly hedge the risks from the CSI 500 because the differences between large-cap and small- to- medium-cap constituent stocks lead to low correlation of the two index futures. Second, the CSI 500 option provides various hedging methods in view of the backwardation of the CSI 500 index futures.

Third, the CSI 500 index options feature non-linear structure and can bring various strategies on back of the higher liquidity of its constitute stocks, which cover more diversified sector leaders compared with CSI 300.

What sector indices are driving most activity at CSI?

Broad-based indices such as the CSI 300, SSE 50, and CSI 500 have delivered active trading volume and become primary underliers in the Chinese financial market.

The themes of ESG and state-owned or central governmentowned enterprises have attracted growing popularity since 2022, driven by national initiatives including the carbon neutral strategy, the establishment of a valuation system with Chinese characteristics and a registration-based IPO system. Having upgraded our sector classification standards in Q4 21, and we plan to release a batch of CSI All Share Sub-Industry Indices as part of our efforts to bring more sector benchmarks and investment underliers to the Chinese market.