FTSE Russell predicts $10bn inflow when A-shares join indices in 2019

FTSE Russell will add China’s growing A-shares market to its global equity indices from June next year.

A-shares, which are listed on the Chinese mainland, will make up roughly 5.5% of the FTSE Emerging index after the first phase of inclusion is completed next summer, the index provider said. This is expected to trigger roughly $10bn (€8.6bn) of inflows into passive products tracking the index.

FTSE Russell cited improvements to market access, including the introduction of the Qualified Foreign Institutional Investor initiative and enhancements to the Stock Connect programme, which linked mainland exchanges to Hong Kong’s equity trading hub.

“The Chinese authorities have continued to introduce reforms designed to open their market to international investors and have transformed their economy into the second largest in the world,” said Mark Makepeace, FTSE Russell’s CEO.

“FTSE Russell was the first international index provider of mainland China benchmarks 20 years ago and we will continue to work with our global clients to provide benchmark and analytic solutions to facilitate their equity and fixed income investments in the region.”

Xinghai Fang, vice chairman of the China Securities Regulatory Commission, added: “The promotion of China A-shares to emerging market status within [the FTSE Global Equity Index Series] is an important next step in the development of our capital markets and reflects the long-term reforms that have been implemented over the past few years.”

Large, mid and small cap A-shares will be added to the FTSE Emerging index in three phases, beginning in June 2019 and completing in March 2020, with a review after each phase. In addition to the 5.5% weighting in the FTSE Emerging index after the first phase, FTSE Russell said it expected A-shares to make up roughly 0.57% of the FTSE Global All Cap index.

Danny Dolan, managing director at asset management group China Post Global, said: “This inclusion is a further concrete step in the ongoing integration of the Chinese stock market into the global financial system… 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 cannot be ignored any more.”

Yesterday, rival index provider MSCI launched a consultation on plans to quadruple the weighting of China A-shares in its emerging market index. 

Fixed income additions

In addition, Makepeace said Chinese government bonds had been added to the company’s “watch list” for potential inclusion in its FTSE World Government Bond index.

It follows a consultation with market participants regarding a country classification framework for global fixed income indices, similar to that already in place for equity benchmarks.

Placing a fixed income market on the “watch list” would demonstrate FTSE Russell’s “intent to engage with governments, central banks and regulators” about how the markets can fulfil the index provider’s criteria, it said. 

Full details of the country classification criteria for fixed income along with its full watch list would be published after discussions with regional fixed income market advisers in November, FTSE Russell said.

Chris Woods, managing director for governance, risk and compliance, said: “Establishing a thorough process for classification of local bond markets in this way brings a much-needed level of transparency to the decisions affecting major global bond indices.

Now that we have added China to the watch list, we look forward to engaging with investors and regulators in the coming months in applying this process.”

Away from China, FTSE Russell has reclassified Kuwait as a secondary emerging market, having previously been a frontier market. In addition, Poland has achieved developed market status and Iceland has been added to the frontier markets index group.

Romania is on FTSE Russell’s equity watch list with a view to adding it to the secondary emerging market group. The index provider’s full list of country definitions can be found here.