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China stock market

FTSE Russell declines to add China A-shares to emerging market index

PUBLISHED : Friday, 30 September, 2016, 6:26am
UPDATED : Friday, 30 September, 2016, 7:04am

Index provider FTSE Russell said on Thursday it would not include domestic Chinese equities in its emerging markets index, aligning with US index maker MSCI’s decision in June not to grant the so-called A shares designation as emerging market assets.

FTSE Russell’s Chief Executive Mark Makepeace said it would keep the A shares on its watch list for possible inclusion as a secondary emerging market, saying it was not a matter of “if but when” China would be elevated to emerging market status.

“China’s important and it is going to happen with China,” Makepeace said by phone. “None of us can quite say when because that’s in the hands of the Chinese authorities, but it is a very large and important market.”

The company said it held off on including Chinese equities because of concerns about China’s capital controls and the country’s penchant for intervention in financial markets.

Makepeace said that though positive changes had been made, including linking the Hong Kong and Shanghai markets, the widening of quota limits and a reduction of controls on the repatriation of funds, foreign investors needed to gain an additional degree of confidence in the country’s markets.

“They’re getting there and they’re making good progress in that way, and they’re getting close to meeting their criteria,” Makepeace said. “They’re not there yet, but they’re getting close.”

MSCI rejection shows China’s market credibility still in question

While the company made no formal changes to its country classification, it noted that it had added Argentina and Romania to its watch list for possible upgrades to frontier market and secondary emerging market status, respectively, and Nigeria for possible downgrade from frontier market to unclassified.

Kazakhstan, Kuwait, Mongolia, Poland and Saudi Arabia all remain on the watch list for possible reclassification, but did not see any changes, according to the statement.

FTSE Russell’s country designations impact the approximately US$124 billion in assets invested across 54 exchange-traded products tracking the company’s index series and offered by major providers such as iShares, Vanguard, Lyxor, JP Morgan, ProShares, Schwab and Deutsche Bank, according to data provided by FTSE.

The company will provide its next formal update in March.

Separately, MSCI said it is continuing to monitor China’s mainland stock market for potential inclusion in its global indexes and has seen some positive developments.

The start of the Shenzhen-Hong Kong Connect, a stock-trading link that will give foreign traders broader access to China’s $6.5 trillion market, could help address repatriation issues international investors face, the index provider said in a statement Thursday.

MSCI “doesn’t rule out a potential off-cycle announcement should significant positive developments occur,” the index provider said in the statement. “More time is still required to properly assess the effectiveness of the new policies.”

Chinese authorities’ recent steps to open up the market may mitigate two of the three concerns MSCI cited when it denied A-share inclusion in its benchmark indexes: a monthly repatriation limit of 20 per cent and a high number of stock suspensions. Officials haven’t yet addressed an issue of pre-approval restrictions on launching financial products, the index provider said.