FTSE adds China A shares onto EM indices

Index provider FTSE Russell has launched new indices to facilitate a transition to China A shares in investors’ portfolios.

The firm expects investors to start adding A shares this year, and has pre-empted rival MSCI by adding the indices.

The firm’s CEO yesterday also implied that one of its clients would start adding A shares to one of the world’s largest ETFs, a switch which would move markets.

Yesterday FTSE Russell announced the introduction of two versions of the FTSE Emerging Markets China A Inclusion Index - a large- and mid-cap version, and an all-cap version.  

“We expect the early adopters to start this transition this year,” said Mark Makepeace, FTSE Russell CEO, “with all investors completing the transition to include A shares in emerging market and global portfolios over the next two to three years.

“The starting gun has been fired to start the transition to include China A shares in global benchmarks.”

Last June, the index provider pre-empted rival MSCI’s June announcement about whether or not it would include A shares in its indexes when it launched the FTSE Global R/QFII index series. This year, MSCI has attempted to avoid a repeat of last year’s focus on one particular date.

In turn, FTSE Russell has shifted its focus – last year it provided investors with insights into how adding China A shares would impact their global portfolios, while yesterday’s launch catered to investors adding A shares to emerging market (EM) portfolios.

Makepeace explained that “a number of our clients are planning to adopt A shares in this way,” by first including A shares in EM portfolios before adding them to global portfolios.

FTSE Russell’s clients include Norges Bank and CalPERS (the California Public Employees’ Retirement System) – which manage the world’s largest sovereign wealth fund and public pension fund respectively.

The index provider also counts the largest emerging-market ETF – the Vanguard FTSE Emerging Market ETF – among its clients. That ETF’s switch from tracking MSCI to FTSE’s emerging market index – implemented in 2013 – had a large negative impact on Korea’s stock market as the manager adjusted from an index with a 15% Korea weighting to one with a 0% Korea weighting.

The prospect of the ETF transitioning to an index including China A shares – which Makepeace implied it would do – promises to negatively impact other emerging markets.

“In order to accommodate China A shares in their portfolios, international investors will have to sell down other countries,” observed Makepeace.

Vanguard Investment Australia is the largest RQFII quota-holder among foreign fund managers, as reported.

The FTSE Emerging Markets China A Inclusion index has a 4.83% weighting to China A-shares and a 24.89% weighting to foreigner-accessible China shares (B and H-shares and P and red chips). The combined China weighting rises from 26.15% at the end of March 2015 to 29.72% with the new index, which is weighted according to R/QFII quota approvals.

After Hong Kong-listed China shares, Taiwan suffers the biggest decline in weighting (from 14.49% to 13.79%); followed by India (12.16% to 11.57%); South Africa (9.63% to 9.17%) and Brazil (8.48% to 8.07%).

Those weightings would decline further as China’s weighting rises following the approval of additional quotas, with China A shares rising to account for 24.21% of the FTSE Emerging Index once included up to their foreign ownership limit.

Combined with Hong Kong-listed China shares, China would then account for almost half (44%) of emerging market portfolios, at end-March 2015 market values.

China A shares’ weighting would rise further once Shanghai-Hong Kong Stock Connect quotas are included in addition to R/QFII quotas approved.

Eddie Pong, FTSE Russell’s research and analytics director, said that “if clients are comfortable then there’s a good chance that that will be included,” referring to the Shanghai-Hong Kong Stock Connect quota.

CSOP Asset Management CEO Chen Ding commented on the FTSE move: “Massively investing in China [has started] to become transparent and feasible.”

This is also highlighted by more foreign investment flowing into China’s onshore bond markets. Makepeace stated that FTSE Russell has a number of ETFs lined up for the onshore China bond indices that the index provider launched in March this year.