A Future For A-Shares

January 25, 2006

The Singapore Exchange and FTSE/Xinhua team up for to launch futures on a China “A-Share” index. Just in time for a market bounce?

The Singapore Exchange has teamed up with FTSE and Xinhua to launch a new futures contract tied to the FTSE/Xinhua China A50 Index, an index of the 50 largest companies listed on the domestic Shenzhen and Shanghai stock exchanges .  A-shares are typically reserved for domestic investors and certain qualified international investors, although the futures contract will be available internationally.  An iShares exchange-traded fund (ETF) tied to the index already trades on the Hong Kong exchange, courtesy of Barclays Global Investors.

The futures product is scheduled to launch in September 2006.

One thing that many U.S. investors don't realize is that the domestic Chinese market has been in a terrible bear market since it peaked in 2001.  Despite a booming economy and growing international interest in Chinese stocks, the Shanghai A-share market is down almost 50 percent from its peak in 2001, when the it experienced a bubble not unlike the Internet-bubble in the U.S.

Many investors, however, are calling for an A-share recovery in 2006.  Dr. Shane Oliver of AMP Capital Investments noted in a recent research piece that valuations on A-shares have come in dramatically, to a price/earnings ratio of 15, from 50 at the height of the bubble.

"Our assessment is that if we haven't already seen it, the next six months are likely to see a major turning point in the China A share market," he wrote

If so, the new options could be a hit.

The Chicago Board Options Exchange trades futures contracts on Chinese companies with American Depository Receipts (ADRs).

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