FTSE Russell recognition to bring new capital, boost confidence
Published: Aug 25, 2019 08:06 PM

File photo: IC

Leading global multi-asset index FTSE Russell has just announced plans to raise the weighting of Chinese A shares in one of its benchmark global indexes to 15 percent from 5 percent. 

The move is likely to attract up to $5 billion in incremental capital from overseas investors into the A-share markets -- not a sensational amount but one that would boost confidence as China further internationalizes its financial markets, one domestic expert said. 

A total of 87 A-share stocks will be newly included in the FTSE Global Equity Index starting from September 23, the index provider announced on Friday. 

This is the second phase of FTSE Russell's three-stage step to incorporate A-share stocks. The company began incorporating Chinese equities in June, and the additions are being made in three stages ending in March next year.

The FTSE Russell's inclusion of A shares is another example of global index providers' recognition of A shares, which, although giving limited stimulus to the markets, would "give a clearer sign of investment direction for international investors," Zhang Xia, chief strategy analyst at China Merchants Securities, told the Global Times on Sunday. 

According to Zhang, the FTSE's planned A-share change in weighting in September will bring about $4 billion of index-replicating passive investment capital inflows, as well as an extra of $900 million in active investment capital. 

"Although the amount of foreign investment brought by the weighting increase might be relatively small, it is significant in the internationalization of the A-share market by boosting market confidence and encouraging more active investment from foreign institutions," Zhang told the Global Times on Sunday. 

Another leading global index provider MSCI on August 8 announced it would increase the inclusion factor of China A Large Cap shares from 10 percent to 15 percent, which Zhang forecast would bring about $3.6 billion more in passive investment capital into the A-share markets.

Zhang noted that in the long run, the proportion of foreign investment in the A-share markets will rise steadily.

"The current valuation of the A-share market is disproportionately low," Zhang said. "Companies have strong potential in the long run. These all stand out as the appeals of the A-share market for international investors, especially against a backdrop of generally weak international market performances," he said. 

The US-based Dow Jones Industrial Average slipped by 2.37 percent to 25,628.90 points on Friday amid deteriorating China-US trade relations. In comparison, the benchmark Shanghai Composite Index edged up by 0.49 percent to 2,897.43 points.