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Global index providers pull in more A-shares

MSCI plans to expand inclusion to smaller China stocks and mid-caps, while UK-based FTSE Russell announced its own additions.

MSCI is considering making equities listed on the tech-heavy Chi Next board eligible from next year, and mid-cap stocks from 2020 in its flagship emerging market indices after including 236 large-caps earlier this year.

The inclusion factor may rise to 20% of the entire A-shares market from 5% currently.

The actual addition will be carried out in two phases, with the weighting increasing by 7.5% each during a May and August review process next year.

Frederick Chu, head of ETFs at China Asset Management, believes an increase of weighting is necessary to better represent the scale of the A-shares market.

The initial inclusion factor of 5% of the whole A-share market translated into a 0.8% weight in MSCI’s emerging market index. The result was minimal, with little change to global capital flows into China’s markets, he said.

Even if money managers ignore the 0.8% allocation to China’s onshore equities, the impact would still be small, he added.

Chu said it is reasonable for MSCI to raise the inclusion factor for A-shares. Some neighbouring markets were included with an initial factor well above 5%, such as Korea (20%) and Taiwan (50%).


China AMC: Warrants preferred over L&I ETFs

Frederick Chu, China AMC

The index provider listed several discussion topics for global investors. A key question it is asking investors is what are the pros and cons if a 20% inclusion factor happens in the next phase.

If the investors endorse the proposal, the A-shares weighting in the MSCI Emerging Markets Index will eventually increase to 3.36% from 0.8% currently.

MSCI will announce the final result of the consultation by the end of February.

FTSE plans

A day after the announcement from MSCI, rival FTSE Russell said it plans to add China’s onshore equities to its global indices starting June 2019 over three phases.

Upon the completion, China’s weight in FTSE’s emerging market index will account for 5.5%, the index provider said in a statement.

The 1200 stocks to be added to the FTSE indices are eligible to trade on the Stock Connect programme.

With global funds worth $1.7trn tracking FTSE-related indexes, the FTSE inclusion could bring capital inflows of $100bn ($14.6bn) into China’s markets, Shanghai-based brokerage Shenwan Hongyuan estimated.

China A-shares would comprise in total roughly 9% of MSCI and FTSE emerging market indices if plans are realised.

China AMC’s Chu said two index inclusions mark the official start of foreign asset allocation to China’s A-shares as overseas asset owners cannot ignore the research on this market.

The right timing

Chu highlighted the timing of the index announcements. China’s financial regulators are pledging to lower systematic risk to achieve market stability, improve liquidity of investment quota schemes, and to internationalise China’s securities with a new Connect programme linked to the London exchange.

He added that A-share valuations after a year-to-date correction have fallen to the lower-end of the historic average price-to-earnings ratio, prompting global investors to start allocating to China onshore stocks.

Among funds available for sale in Hong Kong and Singapore, only one actively-managed fund by Credit Suisse is benchmarked to the FTSE index, according to FE. The CSIF (Lux) Equity Emerging Markets Fundamental Fund currently has a neutral position on China companies listed in Hong Kong and New York.

In addition, the Vanguard FTSE Emerging Markets Ucits ETF is the passive product available that will likely be impacted by the inclusion.

Part of the Mark Allen Group.