A Weighty Matter

The inclusion of the third tranche of China’s A-shares on British stock index provider FTSE Russell’s Global Equity Index Series (GEIS) will kick off on March 23 according to schedule, raising the shares’ index inclusion factor from 15 to 25 percent. The GEIS series includes more than 16,000 large, mid, small and micro cap securities across 49 developed and emerging markets.

There was some worry that the epidemic could affect the process but the fact that it will go on as scheduled indicates the world’s confidence in China’s capital market and the Chinese economy on the whole.

The inclusion of the A-shares on the index started in June 2019 with a 5-percent inclusion factor. For the second tranche in September 2019, the inclusion factor rose to 15 percent. The final tranche in the first phase is expected to bring an inflow of $10 billion of passive funds.

Apart from FTSE Russell, Morgan Stanley Capital International (MSCI) and S&P Dow Jones Indices have also begun to include the A-shares in the past two years. The inclusion factor for the MSCI Emerging Markets Indexes now stands at 20 percent while for the S&P Dow Jones Indices’ global benchmarks, it is 25 percent. The embracing of Chinese A-shares by three leading index indicators demonstrates their confidence in the prospects of China’s financial market and its overall economy.

Their confidence stems from the further opening up of the Chinese capital market, which was faster and deeper in 2018 and 2019 than at any time in the past.

In April 2018, President Xi Jinping announced several measures to ensure that at the Boao Forum for Asia conference. Following his announcement, the People’s Bank of China and China Securities Regulatory Commission issued various policies and measures, including opening the Shanghai-london Stock Connect (SLSC). The SLSC enables companies listed on either bourse to trade on the counterpart’s stock market, thus furthering the link between the two countries’ financial markets and the internationalization of Chinese A-shares.

The opening of the SLSC enabled Huatai Securities, listed on the Shanghai Stock Exchange, to issue its first global depository receipt product on the stock connect in June 2019 and it was traded on the London Stock Exchange the same day. In a reciprocal measure, London-listed companies can also issue Chinese depository receipts in China.

Global index compilers are expected to increase the inclusion factor for Ashares since as the world’s second

largest economy, the Chinese economy now

serves as a barometer of global economic growth and its economic influence is felt by the financial

market