More A-Shares Inclusion Could Lift This China ETF

White  Illustration  File

White Illustration File

US-based MSCI introduced Chinese shares to its indices earlier this year and on Tuesday said it would consider raising China's profile in its Emerging Markets Index over the next two years to 3.36 percent, from the current 0.71 percent.

Fresh from logging their largest percentage gain in years on Friday, Chinese large cap stocks are charging yet again, bolstered by news the influential MSCI is considering upping the weighting given to mainland Chinese stocks in its benchmark indexes. This is expected to trigger roughly $10bn (€8.6bn) of inflows into passive products tracking the index.

The first of those prongs, offering mutual access for investors between the Hong Kong Stock Exchange and the Shanghai bourse, was opened in 2014.

"The Chinese authorities have continued to introduce reforms created to open their market to global investors and have transformed their economy into the second largest in the world", said Mark Makepeace, FTSE Russell's CEO.

Global investors are very interested in Chinese assets, so the FTSE index listing will generate more funds compared to listing in the MSCI index, though capital flows will be less concentrated, Citic Securities Chief Market Strategist Liu Dezhong said.

China A shares won entry to the MSCI indexes in June past year and were added to gauges in May and August.

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MSCI indexes first started including China A-shares this June.

In addition to the push for inclusion of Chinese shares in global indexes, China has opened up new avenues for investment via two-pronged Stock Connect programs to improve capital mobility that was questioned by index compilers over the past few years. "The Chinese government has accelerated the opening up of the market by addressing issues around capital controls and clearing and settlement, resolving previous concerns and ensuring that China's importance to the global economy can not be ignored any more".

In addition, MSCI also proposed to add ChiNext shares to the list of eligible segments for inclusion starting from the May 2019 Semi-Annual Index Review.

FTSE did not give a forecast of how much inflows will come from active investors benchmarked against the index.

Makepeace told a news conference in Shanghai that FTSE Russell would review the inclusion of Chinese bonds in its global indexes next March. "We believe now is a good time to cut into China equities, as foreign investors tend to look into long-term returns", he said.

From a perspective of market impact, FTSE Russell's decision will likely attract more overseas money into China from some of the world's biggest asset managers, pension funds and hedge funds over the longer term. Poland has officially achieved Developed market status and Iceland is being reclassified to Frontier market status. Romania remains on the Watch List for possible reclassification to Secondary Emerging market status. The full FTSE Fixed Income Country Classification framework and a complete Watch List will be published later this year, following meetings of our regional fixed income advisory committees in November.

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