China A Shares inclusion: The end of the beginning

Maxine Elliott    Sandrine Soubeyran, director, research and analytics, FTSE Russell
04 Jul 2019
Categories: General Market Analysis, Investment Management, Investor Education, Equity Investments

Country or region: Asia Pacific (Overall)

Summary:
FTSE Russell's inclusion of China A Shares in the Global Equity Index Series (FTSE GEIS) is only the beginning of the long term process. In time, China's listed equity markets are likely to dwarf the rest of the emerging markets.

Abstract

One development that emerging market equity investors have been watching with interest this year is the inclusion of China A Shares in the FTSE Global Equity Index Series (FTSE GEIS).

Last year, we evaluated the China A Share equity market against the FTSE Equity Country Classification Process and announced in September 2018 that China A Shares available via the Northbound Stock Connect program—the mainstream equity class in that country—would be included in our global and emerging market indexes.

As with all our country classification changes, we made this announcement well in advance of implementation to give market participants time to adjust. We are about to begin including China A Shares securities into FTSE GEIS from June 24 2019. To assist index trackers in their ability to efficiently replicate the underlying benchmark change, we are implementing the inclusion over three separate tranches (Phase 1) through to March 2020. After each tranche, FTSE Russell will seek market feedback on the efficiency of the implementation and to evaluate the ability of the market to absorb the additional assets before proceeding with the next tranche.

Stock inclusion has been calculated using 25% of the investable market capitalization of eligible large, mid and small cap China A Shares. As the chart below shows, upon completion of the Phase 1, China A Shares are expected to constitute c. 5.6% of the total FTSE Emerging Index, representing initial net passive inflows of $10 billion of assets under management.

Source: FTSE Russell – data as at 30 April 2019. This graph contains forward-looking representations based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Please see the end for important legal disclosures.

FTSE Russell formally reviews the country classifications of equity markets globally using a comprehensive, transparent and consistent methodology which verifies that important criteria for market efficiency and quality are met. Ensuring that those investor conditions are achieved lies at the foundation of our country classification evaluation process. China A Shares classification as Secondary Emerging market was a result of constructive engagement with Chinese regulators, stock market officials and international investors/custodians.

Considerations for future inclusion of additional China A Shares after Phase 1 will take place within that framework: specific questions could include whether the size of the next phase should be based on any increase to the quota sizes, whether Phase 1 should be repeated (i.e., taking the total inclusion factor to 50%); and whether stocks outside of Stock Connect routes should be included.

But this is unlikely to be the end of the process: in time, China's listed equity markets are likely to dwarf the rest of the emerging markets. According to our research, China shares could in time form half of all stocks in FTSE Emerging Markets, with A Shares, and ex A Shares (B, H, N, P, Red and S Chips). But whatever happens will be determined using a transparent process, and market participants will be made aware of changes well in advance.

For more on the China A process, please read the research paper, the Q&A, refer to our Country Classification page, or read our infographic. Sign up for our weekly blog update.
 

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Date of original publication:

06/20/2019


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