China A shares: Looking down the road


By Jessie Pak, managing director, Asia, FTSE Russell

There’s an uplifting China story that is incredibly significant for global investors: the introduction of A Shares (available via the Northbound China Stock Connect Scheme Buy-and-Sell List) into the FTSE Global Equity Index Series (GEIS), our flagship global equity benchmark—as well as indexes derived from FTSE GEIS.

Given the significance of this development, let’s take a quick look at where A Shares stand as 2019 enters its second half.


A Shares

Today, China’s A Shares comprise the world’s second-largest equity market, and many international market participants believe that A Shares are now simply too important to ignore.

They include everything from financial services providers to telecommunications giants to leading technology innovators, and are the growth drivers of the world’s second-largest economy.


China Outlook
What is more, in April the IMF set China’s growth at 6.3% this year, and forecasters remain positive on China’s prospects over the next few years.

China is now by some measurements a world leader in many areas of development, including FinTech and mobile payments, as well as drones and other cutting-edge technologies.

In some ways, China is leapfrogging the West as it rapidly climbs the value chain and sheds its identity as a low-cost manufacturer in exchange for a new role as one of Asia’s leading innovators.


Policy Agenda

More specifically, a few major policy and operational developments in recent years have been welcomed by international market participants:

  • A four-fold increase in the Stock Connect Daily Quota Limit (virtually removing the likelihood of an intra-day closure of the facility)
  • Special Segregated Accounts (SPSA), allowing for the facilitation of Delivery versus Payment via the Stock Connect
  • The number of suspended stocks is decreasing, and both the Shanghai and Shenzhen stock exchanges have a closing auction process, which assists benchmark replication
  • Relaxation of repatriation of capital controls for QFII and RQFII accounts and the removal of lock-up period


Against this backdrop, Chinese authorities have implemented both monetary and fiscal measures to support the economy, and have also made efforts to stop the spread of bad debt and to clean up the shadow banking system.


Takeaway

In summary, our decision to promote A Shares to emerging market status is based on a transparent and objection country classification process that is supported by an independent advisory committee consisting of senior market participants.

Adding A Shares to our indexes is an important step in the development of China’s capital markets, and also reflects the positive changes brought by reforms that have been implemented over the past few years.

Our inclusion of large, mid and small cap A Share companies into global benchmarks will result in investors from across the globe channeling more capital into what is still one of the world’s fastest-growing major economies, and we estimate the figure from phase one could reach US$10 billion from passive investors alone.  

As always, the prognosis for equity markets requires thorough consideration of current valuations and evolving macroeconomic conditions. At this juncture, that includes answering the question: what might turn bad news into bad news again?

Photo Credit: Mathias Apitz (Munchen) via Flickr Creative Commons


This article first appeared on the FTSE Russell blog on July 9.



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