Man­agers get­ting in step

China Daily (Canada) - - FRONT PAGE - By OSWALD CHAN in Hong Kong oswald@chi­nadai­lyhk.com

Ben­e­fi­ciary own­er­ship is the third key ob­sta­cle. MSCI noted that as many as­set own­ers tend to in­vest through sep­a­rate ac­counts by del­e­gat­ing in­vest­ment and op­er­a­tional de­ci­sions to fund man­agers, rec­og­niz­ing clear ti­tle to own­er­ship for the ul­ti­mate ben­e­fi­cial own­ers is a cru­cial con­cern for global in­vestors.

The FTSE also shared the con­cerns of MSCI, cit­ing the is­sues of cap­i­tal mo­bil­ity, clear­ing and set­tle­ment, as well as tax­a­tion, when it re­fused el­i­gi­bil­ity for A shares to be in­cluded in its in­dexes in Septem­ber last year.

And STOXX’S Lou noted: “For­eign in­vestors should be able to freely buy and sell the lo­cal cur­rency and there should be no cap­i­tal re­stric­tion as in­ter­na­tional in­vestors have to be able to move funds freely in and out of the coun­try, which is es­sen­tial for us to con­sider for our STOXX stan­dard uni­verse.”

“As the ren­minbi is not fully con­vert­ible, the cen­tral gov­ern­ment is wor­ried that com­plete free­dom of cap­i­tal flow may make the do­mes­tic share mar­ket more volatile, so it has in­stalled the QFII or RQFII quota sys­tem for global in­vestors to par­tic­i­pate the A-share mar­ket,” Pa­trick Shum Hing-hung, in­vest­ment man­ager at Ten­guard Fund Man­age­ment, told China Daily.

“As the quota is lim­ited, for­eign in­vestors are wor­ried that in­clu­sion in global in­dexes at this junc­ture may pres­sur­ize fund man­agers to scram­ble for the ex­pen­sive A-shares.”

In March of last year, MSCI ini­ti­ated a con­sul­ta­tion on a pro­posed roadmap for A-share in­clu­sion. MSCI pro­posed that 5 per­cent of the float mar­ket cap­i­tal­iza­tion of A shares be in­cluded as the first step, trans­lat­ing into a 1.3 per­cent weight­ing of the MSCI EM In­dex. As there are $1.7 tril­lion in funds track­ing the MSCI EM In­dex, A-share in­clu­sion is tipped to trig­ger cap­i­tal in­flows of $22.1 bil­lion into the A-share mar­ket. Con­tact the writer at oswald@chi­nadai­lyhk.com

Even though A shares have as of now been re­fused en­try to global in­dexes, the ex­clu­sion — and even the FTSE’s twin tran­si­tional in­dexes — would likely ex­ert only a neu­tral im­pact on the main­land A-share and Hong Kong eq­uity mar­ket.

“The ef­fec­tive­ness of FTSE’s launch of two tran­si­tional A-share in­dexes de­pends on whether there are any mu­tual in­vest­ment funds track­ing these two new in­dexes. If there is no such in­vest­ment fund, these two new tran­si­tional in­dexes would not make any big dif­fer­ence to the fi­nan­cial mar­ket,” said Pa­trick Shum Hinghung, in­vest­ment man­ager at Ten­guard Fund Man­age­ment.

Some in­dex fund man­agers proac­tively re­sponded to new mar­ket changes by switch­ing their track­ing in­dexes to in­clude A shares.

US in­dex fund man­ager Vanguard Group de­clared in early June, just a few days af­ter the FTSE an­nounce­ment, that the track­ing in­dex of its Emerg­ing Mar­kets ETF (ex­change-traded fund) will switch from FTSE Emerg­ing to FTSE Emerg­ing Mar­kets China A In­clu­sion In­dex, with A shares rep­re­sent­ing 5.6 per­cent of in­dex weight.

The in­clu­sion of A shares in the MSCI EM In­dex would spark greater for­eign in­vestor par­tic­i­pa­tion in the A-share mar­ket, and pro­vide diver­si­fi­ca­tion ben­e­fits in global eq­uity port­fo­lio to over­seas in­vestors be­cause of the low cor­re­la­tion be­tween the A-share mar­ket and other eq­uity mar­kets, a Bank of Amer­ica Mer­rill Lynch (BAML) re­port said.

The Chi­nese A- share mar­ket is the sec­ond-largest eq­uity mar­ket glob­ally and its mar­ket cap­i­tal­iza­tion of $5.2 tril­lion is 8 per­cent of global eq­uity cap­i­tal­iza­tion. Though still a frac­tion of the $24 tril­lion mar­ket cap in the US, daily turnover of the A-share mar­ket in Jan­uary this year reached $85 bil­lion, ex­ceed­ing the $68 bil­lion posted by the US stock mar­ket, ac­cord­ing to BAML.

PHOTO PRO­VIDED TO CHINA DAILY

Bankers ex­pect the con­tin­ued ex­clu­sion of A shares over open­ness con­cerns to have only a neu­tral im­pact on the main­land and Hong Kong stock mar­kets.

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