By Samuel Shen and John Ruwitch
SHANGHAI (Reuters) – After three years of saying “no”, global index provider FTSE Russell is widely expected to welcome mainland Chinese shares into its major benchmarks this week, a move that could drive billions of foreign dollars into a market hit by a trade war.
A decision by FTSE Russell to include so-called A-shares into its widely-followed global benchmarks – expected in New York on Wednesday – would be another win for China’s market regulator, after the historic inclusion of mainland stocks in MSCI Inc’s share indexes in June <MSCI.N>.
Market participants say previous sticking points around capital controls and clearing and settlement are no longer issues, leading analysts to believe a “yes” decision is likely.
Eugenie Shen, Managing Director of the Asia Securities Industry & Financial Markets Association (ASIFMA), said FTSE Russell is “likely” to include A-shares in its global emerging markets index, following MSCI’s move. ASIFMA represents over 100 global financial institutions, including some of the world’s biggest asset managers that use FTSE indexes as benchmarks.
Duan Shihua, general manager of Chinese index publisher Shanghai Changer Investment Management Consulting, estimates a FTSE inclusion would initially trigger $15 billion of foreign inflows into the market.
“If you don’t add China – the world’s biggest emerging market – into your emerging market index, your benchmark would be defective, at least incomplete,” he said.
A FTSE Russell spokesperson said its annual country classification announcement would be published after the U.S. market close on Wednesday but declined to comment on whether China would be included.
A person familiar with the matter said if China is given the green light, the actual FTSE index inclusion could happen within a year.
According to FTSE, about $16 trillion is currently benchmarked to its indexes.
The inclusion of Chinese shares would mean that passive funds tracking FTSE’s All-World and emerging markets indexes would be forced to buy yuan-denominated A-shares.
Last month, FTSE Russel CEO Mark Makepeace told Reuters that FTSE could give a greater weighting to A-shares than MSCI if a “yes” decision is made.
Chinese brokerage GF Securities said a higher weighting would mean FTSE could match its bigger rival MSCI in terms of pulling money into China.
MSCI gave A-shares a roughly 0.8 percent weighting in its emerging market benchmark initially, triggering an estimated $18 billion of inflows. On Wednesday, MSCI said it would consider increasing Chinese share weighting in its indexes.
Fresh capital would help anchor China’s wobbly stock market and ease depreciation pressure on the yuan <CNY=CFXS>, as Beijing steps up moves to counter the destabilising impact of a worsening trade war with Washington.
FTSE started vetting the China market for inclusion in 2015, but has so far put A-shares on its watch-list.
In its March interim review, FTSE said the market was not qualified for inclusion as a “Secondary Emerging” market, mainly due to strict capital controls and settlement inefficiency.
But some analysts say those problems have been largely addressed.
ASIFMA’s Shen said capital mobility is no longer an issue after regulators in May quadrupled daily quotas under Stock Connect, a key channel for cross-border investment.
So far, A-shares’ smooth MSCI entry “demonstrates settlement and clearing is not an issue”, she said.
Duan of Shanghai Changer said MSCI’s inclusion of China shares challenges FTSE to follow suit. In addition, FTSE’s parent, the London Stock Exchange Group <LSE.L>, is working closely with Chinese regulators to launch the Shanghai-London Stock Connect, so giving the nod now to an A-share inclusion “makes perfect strategic sense.”
(Editing by Vidya Ranganathan and Sam Holmes)