The China Europe International Exchange's (Ceinex) move in February to expand its product offering beyond bonds and China-related futures and exchange traded funds (ETFs) to include D-Shares of prominent Chinese companies and ETF derivatives, SRP spoke to Dr. Chen Han, co-CEO of the firm about the its plans in the region and how structured products will be a natural evolution of its product catalogue.

Since February 2017, futures on the db x-trackers Harvest CSI300 Index ETF have been available for trading on the German derivatives exchange Eurex. The ETF fully replicates the CSI 300 index and is managed by Deutsche Bank together with Hong Kong-based firm Harvest Global Invest.

The new product is aimed at asset and hedge fund managers, as well as institutional and retail investors, and will be followed by options contracts linked to the same underlying, according to Dr. Han.

"Predominantly traded in euros, Ceinex products are deployed by global investors across different risk categories for trading, hedging, positioning, and leveraging," says Dr. Han, adding that the current Ceinex ETF line up covers broad Chinese market indices, such as the CSI300, SSE50, FTSEA50, MSCI China A, and S&P China 500 indexes, to be used by institutional and sophisticated investors seeking "strategic portfolio building blocks" to get "core beta exposure to China's equity market".

However, according to Dr. Han, Ceinex offers also the opportunity to combine participation in the performance of leading Chinese corporations with participation in the "narrowing of the spread between constituent A- and H-shares" via an ETF tracking the FTSE A-H 50 index.

"ETFs are the preferred instrument to address various levels of risk appetite," says Dr. Han, pointing that investors from the middle risk category, who are on the hike for yield and still ready to take up on some CNH and China sovereign debt risk, are looking at fixed-income ETF opportunities while the sector-equity ETFs are available to risk-seeking investors who look for specific sector exposure.

"As [the] risk appetite increases, preferences shift towards the broad-based equity ETFs on Ceinex that should deliver the core beta exposure," says Dr. Han. "Most of the liquidity is concentrated on exactly this type of product, in particular the CSI 300 based ETFs which record the highest assets under management (AUM) and write close to € 4m in trading per day."

According to Dr. Han bid-ask spreads have recently narrowed which has made possible to execute trades at 10 to 20 bps at peak times.

Beyond ETFs, Ceinex is also offering China- and RMB-based debt instruments in collaboration with third-party bond issuers such as the Kreditanstalt für Wiederaufbau (KfW, Germany's Investment and Development Company), Bank of China, and China Construction Bank. "We will continue to introduce more bond instruments outside of Mainland China to enhance the cooperation between the Chinese and the European real economies," says Dr. Han, adding that now that the first futures linked to the db x-trackers Harvest CSI 300 Index ETF are available for trading, "European investors are looking forward to the options on the same ETF which will allow for better hedging of their positions on the Chinese capital market".

"This step is part of our plan to gradually build up our derivatives product offering," says Dr. Han. "These products will create the perfect basis for investment banks to step in and create all kinds of different structured products, which we see as a natural follow-up, especially given the popularity of structured investments among German retail investors."

According to DR. Han, the core value of Ceinex is making investments in China accessible to the global investor. However, Chinese companies that wish to expand to European markets and diversify their investor base can do so through a secondary listing in Germany via so-called D-shares.

"D-Shares are an individual equity and attract a slightly different investor type, in particular institutional investors and/or active fund managers who select individual stocks for their portfolios," says Dr. Han. "As an individual equity, D-shares target investors that look for a direct participation in the performance of Chinese blue-chips. The concept is for leading Chinese A-share companies to raise capital by issuing shares in the Frankfurt stock market that will be traded on Deutsche Börse's Xetra platform."

The appeal of these shaes, according to Dr. Han, is that while issuing Chinese companies can re-invest the funds collected through D-shares to further support their outbound strategies in Europe, D-shares also offer European and international investors a new way to invest in the Chinese economy.

"We are finalizing the last measures in the practicability of this new concept with the German and Chinese regulators, as well as the international buy- and sell-side, and we have our first potential candidates in the face of several Chinese industry leaders," says Dr. Han.

Ceinex seeks to gain reliability and increase liquidity to foster price discovery by addressing short- and medium-term investor demand, according to Dr. Han. A higher level of connectivity through trading time overlap with the underlying Chinese domestic market is an example for a challenge Ceinex needs to address, as "it will create more opportunities for arbitrage between products and markets".

Dr. Han sees the recent initiatives to overcome capital flow restrictions and liberalise the financial market in China as a positive development. "These include the QFII and RQFII quotes for China investments made by eligible foreign institutional investors, and the trading links known as Shanghai- and Shenzhen-Hong Kong Stock Connect that aim to internationalise the investor base of stocks traded on China mainland's largest exchanges," says Dr Han. "Ceinex acts as another opportunity for global investors and Chinese companies to benefit from the financial integration between China and Europe."

For the remainder of the year 2017, Ceinex "expects to launch Europe's first smart beta pure A-share ETFs", according to Dr. Han. "Given the opening of China's mainland inter-bank bond market, we plan to also extend our fixed-income offering," says Dr. Han.

China Europe International Exchange (Ceinex) was established as a joint venture in 2015 by Deutsche Börse Group (DBAG), Shanghai Stock Exchange (SSE), and China Financial Futures Exchange (CFFEX) and is aimed to global investors with interest in China-based and RMB-denominated investments. While the majority stake of Ceinex is held by the Chinese party (40% owned by SSE and 20% owned by CFFEX), operations are executed within Deutsche Börse's framework and, thus, European law. Starting off with Chinese ETFs on equity, fixed income and currency indices, and RMB-denominated bonds, Ceinex has expended its offering to include depositary receipts on A-shares, D-shares, and ETF derivatives.

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