China-listed stocks are to soon be added to FTSE Russell’s global indexes, another step in the nation’s efforts to internationalize its markets.
The shares are to be included in three stages from June next year, FTSE Russell, a unit of London Stock Exchange Group PLC, said in a statement.
The plan means that China A shares would comprise about 5.5 percent of the FTSE Emerging Index, representing initial net passive inflows of US$10 billion of assets under management, the company said.
FTSE would also add Chinese government bonds to its watch list for possible inclusion into indices.
FTSE’s decision, coming soon after MSCI Inc added Chinese companies to its benchmarks, is another victory for the nation’s leaders, who have prioritized integration into the global financial system.
While access is still restricted by quotas and a trading link via Hong Kong, authorities are keen to increase foreign participation in its capital markets.
The round of inclusion would be the first of several and would see about 1,200 Chinese firms join FTSE Russell indices, chief executive officer Mark Makepeace said by telephone.
“You are looking at a journey that may take five or so years. It is a journey that is probably going to mean that at least 10 percent of global portfolios will be in Chinese companies. That is a huge, huge change and should be a big boost for the China market,” he said.
A decision on whether to include China’s bonds in indices could be made in either March or September next year and is partly contingent on whether Chinese authorities make the bond trading rule changes FTSE has asked for, Makepeace said.
Any inflows from FTSE-tracking funds would be a boon for Chinese stocks, which are among the world’s worst-performing equities this year.
The Shanghai Composite Index is down 15 percent this year. Retail investors have historically dominated stock market trading in China, resulting in some spectacular booms and busts.
“We need more institutional investors in China to improve market quality,” said Francis Lun (藺常念), Hong Kong-based chief executive officer of Geo Securities Ltd (智易東方證券). “China’s market is unhealthy as it is a small investor market who are not investing for value.”
About 95 percent of the 145 million stock trading accounts in Shanghai and Shenzhen at the end of last year were for small retail investors, Shanghai Stock Exchange vice general manager Que Bo (闕波) told a forum on Wednesday in Beijing.
FTSE’s decision is not a surprise, given the size and scale of China’s market, Aberdeen Standard Investments head of China equities Nicholas Yeo (姚鴻耀) said.
“As long as the Chinese government continues to improve regulations like tightening up trading suspension, widening market access, encouraging companies to improve environmental, social and governance standards, we don’t see why index providers wouldn’t include A-shares or increase China’s weighting,” he said in a statement.
The securities would be added from the pool of Chinese A shares that can be traded through the Hong Kong stock links.
As of the end of last month, that comprised 1,249 companies, according to FTSE, which is to apply a cap of 25 percent of a stock’s investibility weighting to each security.
MSCI began adding so-called A shares to its indices earlier this year. The New York-based firm is now considering whether to increase the weighting of Chinese stocks in its gauges.
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