FTSE Russell has declined to follow fellow index provider MSCI by deciding not to include China A-Shares in the emerging markets classification of the FTSE Global Equity Index Series (FTSE GEIS).
The inclusion of China A-Shares would increase China’s weight in the FTSE Emerging Index from 29% to 32%.
FTSE Russell said China A-Shares will remain on the watch list for possible future inclusion in the GEIS.
In June this year, MSCI announced it would be including China A-Shares in its emerging markets indices from June 2018.
FTSE Russell formally reviews country classifications within the GEIS once a year in September, incorporating ongoing country classification research and feedback from an independent external advisory committees to designate markets as developed, advanced emerging, secondary emerging or frontier.
The index provider reviews its country classification in view of the regulatory environment, infrastructure and quality of the capital market, the depository and clearing system, as well as the status of derivatives markets.
Since the 2016 annual review, Chinese authorities have sought to improve the attractiveness of the Stock Connect programme to international investors. The Shenzhen-Hong Kong Connect route was opened in December 2016 and there are plans for investors to be able to access cross-border IPOs via the Primary Equity Connect initiative.
However, FTSE Russell believes that the coverage of the Connect programmes, daily quota limits, the number of trading holidays and the comparatively high level of stock suspensions continue to present concerns to international investors, hence China A-Shares are to remain on the watch list.
FTSE Russell does however produce the FTSE Global China A Inclusion Index Series, which is a suite of indices weighted as if China A-Shares were included in the GEIS (both QFII/RFQII quota and no quota restriction versions) to prepare investors for the expected eventual elevation of the country to the emerging economy classification.
Mark Makepeace, CEO FTSE Russell, commented: “The China A-Share market continues to make progress. I expect to see growing use of our FTSE Global China A Inclusion Indexes prior to China A-Shares entering our core global benchmarks.”
European-domiciled ETFs that will be affected by the eventual inclusion of China A-Shares in the FTSE GEIS include the Vanguard FTSE Emerging Markets UCITS ETF (LON: VFEM), the PowerShares FTSE Emerging Markets High Dividend Low Volatility UCITS ETF (LON: HDEM) and the Lyxor FTSE Emerging Minimum Variance UCITS ETF (Euronext Paris: NVAM)
Saudi Arabia
The other notable outcome of FTSE’s annual review was the pronouncement that Saudi Arabia was close to upgrade and will be assessed again in March 2018.
Whilst it has been made to wait, the Arab giant has recently stepped up the pace of capital market reforms and FTSE Russell anticipates the the country will meet the requirements for inclusion as a secondary emerging market from early 2018 when further enhancements to the Independent Custody Model (ICM) are scheduled to be introduced.
The index provider states it will proceed with the launch of stand-alone Saudi Arabia country indices and global and regional Saudi Arabia inclusion indices for investors looking for early index-based exposure to the market.
According to Makepeace: “The Saudi Arabian authorities should also be congratulated on their very significant progress. The policy changes necessary for promotion have been put in place and we will now begin work with institutional investors and market practitioners to prepare for the promotion of the Saudi Arabian market. I fully expect us to finalise these arrangements and announce the implementation schedule in March next year.”
FTSE Russell plans to work closely with the Saudi Arabian authorities and index users over the coming months to ensure the efficacy of the recent and intended reforms and the readiness of index users and market practitioners to be included in the GIES. This necessary due to the size of international investor flows that follow a change to a country’s classification status.