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A Weighty Matter
The foreign index companies should rethink increasing the weightage of Chinese A-shares
By Lan Xinzhen  ·  2020-03-15  ·   Source: NO.12 MARCH 19, 2020

The inclusion of the third tranche of China's A-shares on British stock index provider FTSE Russell's Global Equity Index Series (GEIS) will kick off on March 23 according to schedule, raising the shares' index inclusion factor from 15 to 25 percent. The GEIS series includes more than 16,000 large, mid, small and micro cap securities across 49 developed and emerging markets.

There was some worry that the epidemic could affect the process but the fact that it will go on as scheduled indicates the world's confidence in China's capital market and the Chinese economy on the whole.

The inclusion of the A-shares on the index started in June 2019 with a 5-percent inclusion factor. For the second tranche in September 2019, the inclusion factor rose to 15 percent. The final tranche in the first phase is expected to bring an inflow of $10 billion of passive funds.

Apart from FTSE Russell, Morgan Stanley Capital International (MSCI) and S&P Dow Jones Indices have also begun to include the A-shares in the past two years. The inclusion factor for the MSCI Emerging Markets Indexes now stands at 20 percent while for the S&P Dow Jones Indices' global benchmarks, it is 25 percent. The embracing of Chinese A-shares by three leading index indicators demonstrates their confidence in the prospects of China's financial market and its overall economy.

Their confidence stems from the further opening up of the Chinese capital market, which was faster and deeper in 2018 and 2019 than at any time in the past.

In April 2018, President Xi Jinping announced several measures to ensure that at the Boao Forum for Asia conference. Following his announcement, the People's Bank of China and China Securities Regulatory Commission issued various policies and measures, including opening the Shanghai-London Stock Connect (SLSC). The SLSC enables companies listed on either bourse to trade on the counterpart's stock market, thus furthering the link between the two countries' financial markets and the internationalization of Chinese A-shares.

The opening of the SLSC enabled Huatai Securities, listed on the Shanghai Stock Exchange, to issue its first global depository receipt product on the stock connect in June 2019 and it was traded on the London Stock Exchange the same day. In a reciprocal measure, London-listed companies can also issue Chinese depository receipts in China.

Another measure to open up the capital market is the full circulation of H-shares, allowing domestically held shares to be traded in Hong Kong. The government is encouraging more stock connects.

Besides, the investment quota limit for qualified foreign institutional investors and renminbi qualified foreign institutional investors has been removed, making it more convenient for foreign institutional investors to invest in the China interbank bond market.

Foreign capitals have been given greater access to some of China's financial services. Last year, the authorities approved the establishment of two foreign-owned securities companies and issued licenses to some foreign players to underwrite corporate bonds in China and provide credit rating services.

In 2019, the Shanghai Stock Exchange and Japan Securities Group signed an agreement to allow cross-listing of exchange-traded fund products and the mechanism began to work in the same year.

So far, the weighting for Chinese A-shares on the FTSE Russell GEIS and MSCI Emerging Markets Indexes is respectively 0.57 percent and 5.57 percent, which is too low given China's huge financial market. Global index compilers are expected to increase the inclusion factor for A-shares since as the world's second largest economy, the Chinese economy now serves as a barometer of global economic growth and its economic influence is felt by the financial market.

This year, the Chinese capital market will be further opened up with the removal of foreign ownership limits on securities, fund management and futures to be fast-forwarded to 2020 from 2021. From December 1, foreign ownership limits on securities will be scrapped, which is expected to see more and diverse foreign-owned entities in the Chinese capital market.

There may be another big step forward by relaxing control over international capital outflows. Besides, linking the Chinese capital market with the U.S. and European capital markets is likely to be put on the agenda.

Given this backdrop, the foreign index companies, which provide their services to billions of investors, should rethink increasing the weightage of Chinese A-shares.

Copyedited by Sudeshna Sarkar

Comments to lanxinzhen@bjreview.com

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