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China's drive for global market integration nabs 'soft power' victory

FTSE Russell to add A-shares in indexes, following MSCI move to increase weighting

A brokerage house in Shanghai
In the FTSE Global All Cap Index, A-shares are expected to have a weighting of roughly 0.57%   © Reuters

HONG KONG -- China's domestically listed stocks will be added to the FTSE Russell's global indexes, the data and analytics provider said on Thursday, giving Beijing another victory in its push for greater global financial integration. The announcement comes a day after MSCI said it would consider lifting the weighting of mainland stocks in its benchmark indexes.

FTSE Russell, owned by the London Stock Exchange Group, said it will begin including China A-shares into its global equity index series in three phases starting from next June to March 2020. A-shares will make up about 5.5% of the FTSE Emerging Index "representing initial net passive inflows of $10 billion of assets under management," the company said in a statement. In the FTSE Global All Cap Index, A-shares are expected to have a weighting of roughly 0.57%, it said.

"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," Mark Makepeace, CEO of FTSE Russell, said in a statement, adding that China would also be added to its watch list for possible inclusion in FTSE's global bond indexes.

Fang Xinghai, vice chairman of the China Securities Regulatory Commission, noted in the same statement that the move marks 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."

The Shanghai Composite Index has tumbled about 15% this year on concerns over the U.S.-China trade dispute, slower economic growth and weak investor sentiment. On Wednesday, the market slipped 0.5% to close at 2,791.77.

Nicholas Yeo, head of China equities at Aberdeen Standard Investments in Hong Kong, said that investors should expect to see increased weightings of Chinese stocks in global indexes given the size of its markets.

"As long as the China 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," Yeo said in a note.

"The inclusion of more Chinese companies in global indexes is welcome as it will help raise the profile of A-shares among international investors and diversify global portfolios," he said.

On Wednesday, MSCI said it was launching "consultation on a further weight increase of China A-shares" to 20% in its widely tracked global indexes following an initial 5% inclusion of domestically traded large-cap shares earlier this year. The U.S. provider of market indexes said it is seeking investor feedback on the proposal and will announce its decision at the end of February 2019.

China's inclusion in global market indexes is part of the country's growing "soft power," said Jim McCafferty, head of equity research Asia ex-Japan at Nomura in Hong Kong. "Increasingly with these index changes, investors can't ignore China," he told the Nikkei Asian Review. "I think you will see incremental increases in China exposure [among foreign investors] over the next several years, and then China will be treated like any other market."

While China has displaced Japan as the world's second-biggest economy, its equity markets lag those in Japan in terms of market capitalization, he noted.

The Shanghai Stock Exchange is the world's fourth largest, with a market cap of $5.01 trillion as of March, behind the Tokyo Stock Exchange at $6.22 trillion, according to U.K. online trading company IG Group. (The New York Stock Exchange, at $23.12 trillion, and the Nasdaq, at $10.93 trillion, are the two largest.)

"The elephant in the room is China," McCafferty said, adding that it has every reason to be ahead of Japan in terms of market cap. "Getting direct access to China's markets -- that is what's changing."

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