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Exclusive - FTSE Russell may weight mainland China stocks more heavily than MSCI

Exclusive - FTSE Russell may weight mainland China stocks more heavily than MSCI
FILE PHOTO: An investor looks at an electronic board showing stock information at a brokerage house in Shanghai, China November 24, 2017. REUTERS/Aly Song/File Photo   -   Copyright  ALY SONG(Reuters)
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By Jennifer Hughes

HONGKONG (Reuters) – Index provider FTSE Russell could give a greater weighting to mainland Chinese stocks than rival MSCI if it decides to include them in its flagship indices next month, its chief executive told Reuters.

MSCI this year became the first index provider to force its passive fund followers into Shanghai and Shenzhen-listed stocks – a milestone in the opening up of Chinese markets to international capital. It was also a highly contentious move due to investor concerns about Chinese corporate governance and market practices.

The growing financial might of mainland firms is hard to ignore. Shanghai and Shenzhen-listed A-share companies are worth a combined $7.1 trillion in market capitalisation – and together can be considered the world’s second-largest equity market.

In MSCI’s flagship emerging markets index, Chinese A-shares still only account for 0.78 percent – part of a gradual, phased inclusion to avoid sudden market moves. Asked whether FTSE Russell’s A-share weighting could be bigger, CEO Mark Makepeace said: “I think that’s a possibility.”

“We’ll only do it if we have the support of the big investors,” he said in an interview, adding that the firm was still consulting with investors and other stakeholders.

The FTSE emerging markets index currently has a slightly higher total proportion of Chinese stocks – mainly those listed in Hong Kong and New York – at 32.2 percent compared to MSCI’s 31.2 percent.

The growing popularity of passive funds which track indices has made index providers powerful arbiters of market trends. Trillions of dollars are benchmarked against MSCI and FTSE Russell indices.

FTSE Russell estimates that about 40 percent of passive funds tracking global indices as well as global emerging market indices follow its benchmarks and the rest follow MSCI. MSCI did not immediately respond to a request for comment.

Makepeace’s comments follows an announcement this week by the China Securities Regulatory Commission (CSRC) that attracting inflows to China was among its priorities.

The commission said it would “actively support the inclusion of A-shares in the FTSE Russell international index and raising the proportion of A-shares in the MSCI index.”

China has recently made a raft of decisions giving foreigners greater access to its markets. These include the easing of foreign investment curbs in the banking, auto and resources sectors.

In June, Beijing lifted a monthly cap on foreign fund manager outflows which investors had frequently cited as a sticking point for their China interest.

(Reporting by Jennifer Hughes; Additional reporting by Andrew Galbraith in Shanghai; Editing by Edwina Gibbs)

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