FTSE Russell to Add Chinese Stocks to Its Indexes From 2019

(Bloomberg) -- Chinese-listed stocks will soon be added to FTSE Russell’s global indexes, another step in the country’s efforts to internationalize its markets.

The shares will be included in three stages from June, FTSE Russell, a unit of London Stock Exchange Group Plc, said in a statement. The plan means that China A shares will comprise about 5.5 percent of the FTSE Emerging Index, representing initial net passive inflows of $10 billion of assets under management, the company said. FTSE will also add Chinese government bonds to its watch list for possible inclusion into indexes.

FTSE’s decision, coming soon after MSCI Inc. added Chinese companies to its benchmarks, is another victory for the country’s leaders, who’ve prioritized integration into the global financial system. While access is still restricted by quotas and a trading link via Hong Kong, authorities are keen to increase foreign participation in their capital markets.

This round of inclusion will be the first of several and will see around 1,200 Chinese firms join FTSE Russell indexes, Chief Executive Officer Mark Makepeace said by phone. “You are looking at a journey that may take five or so years. It is a journey that is probably going to mean that at least 10 percent of global portfolios will be in Chinese companies. That is a huge huge change and should be a big boost for the China market.”

A decision on whether to include China’s bonds in indexes could be made in either March or September 2019 and is partly contingent on whether Chinese authorities make the bond trading rule changes FTSE has asked for, Makepeace said, without elaborating.

Any inflows from FTSE-tracking funds would be a boon for Chinese stocks, which are among the world’s worst-performing equities this year. The Shanghai Composite Index is down 15 percent in 2018. Retail investors have historically dominated stock market trading in China, resulting in some spectacular booms and busts.

“We need more institutional investors in China to improve market quality,” said Francis Lun, Hong Kong-based chief executive officer of Geo Securities Ltd. “China’s market is unhealthy as it is a small investor market who are not investing for value.”

Some 95 percent of the 145 million stock trading accounts in Shanghai and Shenzhen at the end of last year were for small retail investors, Shanghai Stock Exchange vice general manager Que Bo said at a forum Wednesday in Beijing.

FTSE’s decision is not a surprise given the size and scale of China’s market, said Nicholas Yeo, head of China equities at Aberdeen Standard Investments.

“As long as the China government continues to improve regulations like tightening up trading suspension, widening market access, encouraging companies to improve environmental, social and governance standards, we don’t see why index providers wouldn’t include A-shares or increase China’s weighting,” he said in a statement.

The securities will be added from the pool of Chinese A shares that can be traded through the Hong Kong stock links. As of the end of August, that comprised 1,249 companies, according to FTSE, which will apply a cap of 25 percent of a stock’s investibility weighting to each security.

MSCI began adding so-called A shares to its indexes earlier this year. The New York-based firm is now considering whether to increase the weighting of Chinese stocks in its gauges.

--With assistance from Jun Luo.

To contact Bloomberg News staff for this story: Evelyn Yu in Shanghai at yyu263@bloomberg.net;Benjamin Robertson in Hong Kong at brobertson29@bloomberg.net;Amy Li in Shanghai at yli677@bloomberg.net

To contact the editors responsible for this story: Sam Mamudi at smamudi@bloomberg.net, ;Richard Frost at rfrost4@bloomberg.net, Philip Glamann, Ron Harui

©2018 Bloomberg L.P.

With assistance from Editorial Board