A shares' global exposure comes with risks

By Wang Jiamei Source:Global Times Published: 2019/9/24 20:53:41

A shares’ growing exposure to global investment comes with potential risks

Illustration: Luo Xuan/GT

China's A-share market failed to get off to a flying start on Monday, the first trading day after two major global benchmarks widened their inclusion of A shares. The benchmark Shanghai Composite Index closed down 0.98 percent at 2,977.08 points, while the Shenzhen Component Index finished down 1.01 percent at 9,781.14 points.

Analysts generally attributed the losses to uncertainties surrounding trade talk progress between China and the US. While the trade issue is just one of the causes, the relatively sluggish overseas stock markets may also be a factor. Monday's market performance may serve as a reminder that as China opens up its equities market to the outside world, its financial market will see more impact from global fund flows, along with risk spillover effects in the context of the imminent global economic recession.

On Monday, leading global index provider S&P Dow Jones Indices officially added 1,099 A shares, weighted at 25 percent, to its S&P Emerging BMI for the first time, while FTSE Russell, another index provider, raised the inclusion factor for Chinese stocks in its FTSE Emerging Markets Index from 5 percent to 15 percent. Moreover, MSCI had already announced that it would strengthen the inclusion factor for large-cap A shares in its Emerging Market Index from 15 percent to 20 percent, effective from November.

Needless to say, the increased inclusion levels will funnel foreign capital inflows into the mainland stock market from global investors tracking those international index benchmarks. Specifically, the S&P Dow Jones Indices move is expected to generate $1.1 billion in foreign capital inflows for A shares, according to China Merchants Securities. FTSE Russell estimated that its increased inclusion will bring an inflow of $4 billion for the mainland stock market.

According to Shanghai-based information provider Wind Info, a net total of 14.86 billion yuan ($2.1 billion) flowed into the A-share market via the stock connects linking Hong Kong and the mainland on Friday, the second highest daily level since the launch of the stock connect program. As of September 22, net capital inflows to A shares totaled 182.37 billion yuan this year, approaching the record yearly high of 199.74 billion yuan in 2017.

Besides, China's State Administration of Foreign Exchange announced in early September that the two investment quota restrictions for foreign institutional investors would be scrapped, in order to encourage foreign funds' participation in the mainland equities market.

In the long run, the increased inclusion of A shares by major global benchmarks may offer the mainland stock market more than just a short-term spike in capital inflows. In fact, as the A-share market accelerates its opening-up to the world, the inflow of billions of long-term foreign capital will have profound effects on the development of the domestic financial market.

Nevertheless, it should be noted that the growing exposure to global capital flows will also bring challenges.

Last week, the Federal Reserve announced a second interest rate cut this year, indicating deteriorating fundamentals in the US. Meanwhile, US stocks are currently near all-time highs, with the Dow Jones Industrial Average staying around 27,000 points. Given the increasing correlation between A shares and US stocks, the risk spillover deserves attention.

Egypt's stocks also plummeted before trading was suspended for 30 minutes on Sunday. The EGX 100 index dropped by 5 percent, the biggest daily fall since June 2016. While the Egyptian factor is expected to have a limited impact on the global markets, in a highly connected global market environment, a country's financial risks tend to spread rapidly to other countries. A-share investors will need to watch out for this kind of risk transmission.

The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn
Newspaper headline: A shares’ growing exposure to global investment comes with potential risks


blog comments powered by Disqus