Preparing for China’s inclusion in global benchmarks - A flexible approach to managing the transition

Categories: Industry/Sector Analysis, General Market Analysis, Equity Investments

Country or region: Asia Pacific (Overall), China, Hong Kong SAR

China has shown strong indications that it is willing to open its market to international investors. The approval of QFII/RQFII licenses and quota has been increasing at a tremendous pace since 2011. The launch of the Shanghai-Hong Kong Stock Connect programme last year and the recent confirmation of a stocktrading link between Shenzhen and Hong Kong by the China’s State Council, has shown clear evidence that the Chinese regulators and stock exchanges are making significant efforts to improve the regulatory environment and trading mechanisms. An increasing number of investors are asking questions such as: When will China be included in global benchmarks? What can investors do to prepare for a possible inclusion? This paper aims to answer these questions and is intended for market participants as they prepare for China inclusion in FTSE’s global benchmarks. Section 1 and 2 describe the development of the China A-shares market and the milestones towards its globalization. The FTSE country classification system and the assessment results on China are discussed in Section 3. Section 4 outlines FTSE Russell’s solution to the China A-shares market changes. Conclusions can be found in Section 5.

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- Following further increases in R/QFII allocations and improvements in the R/QFII application process, on May 26, 2015 FTSE Russell announced the start of its transition to include China A Shares in its widely followed global benchmarks, with the launch of new FTSE China A Inclusion Indexes. - China is opening its market to foreign investors at a significant pace. It is increasingly likely that within two to three years China A-shares will become eligible for inclusion in FTSE’s global indexes. To facilitate this growth in access, the FTSE China A Inclusion Indexes will give market participants a range of index choices to help them prepare for the inclusion of China A-shares in global benchmarks. - There will be no change to the standard FTSE Global Equity Index Series. Based on FTSE’s Annual Country Classification announcement, dated September 2014, China A-shares are not yet eligible for FTSE’s standard global benchmarks. For inclusion further progress is required as part of FTSE’s country classification process in areas such as market accessibility and quota allocation, as well as capital repatriation. - FTSE Russell will continue to consult and engage with market participants and the Chinese authorities to monitor developments and gauge progress in these key areas. A formal review of the status and eligibility of A-shares will be held every September. The next review is due in September 2015. - The FTSE China A Inclusion Indexes have been created to prepare market participants for the inclusion of China A-shares in FTSE’s standard indexes. It will provide market participants with the following benchmark options: * Global benchmarks with China A-shares included and weighted by the aggregate approved quota(including QFII/RQFII) * Global benchmarks with China A-shares included and weighted by free float and foreign ownership adjusted market value as if there were no quota restriction * Customized indexes based on an investor’s own QFII/RQFII allocation - Market participants who do not wish to have A-shares in their global benchmarks can continue to use the FTSE Global Equity Index Series. - The index series provides a range of benchmark choices reflecting alternative ways for market participants to access the mainland China market. It has been created for clients: * Who would prefer to increase their China exposure over a period of time; * Who have no quota constraint and would prefer a higher allocation to China A-shares; * Who prefer having an allocation to China A-shares based on their own quota size. - With over 14 years of experience developing China market indexes, FTSE’s China benchmarks have become widely recognized by investors and ETF issuers globally as the leading measure of the China equity market and the natural choice for creating China-themed investment products.

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