FTSE announces first emerging markets indexes with China A shares exposure

Allows institutional investors to add an initial increment of China A shares exposure to their emerging markets benchmarks.

FTSE Tuesday announced the launch of two “transitional indexes” allowing institutional investors to add an initial increment of China A shares exposure to their emerging markets benchmarks.

A London-based FTSE spokeswoman said the FTSE Emerging Markets China A Inclusion index would allow investors to focus their A shares investments in large-cap stocks, while the FTSE Emerging Markets All-Cap China A Inclusion index would cover a full range of stocks on the mainland.

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Those transitional indexes are separate and distinct from FTSE’s standard emerging markets and global indexes. A FTSE news release said FTSE executives will “consult widely with institutional investors prior to determining the timing of the inclusion of A Shares” in its standard indexes.

The weight of A shares in the transitional indexes will be determined by the combined total of quota capacity available under the qualified foreign institutional investor program launched by China’s regulators 12 years ago, and the renminbi qualified foreign institutional investor program launched just over three years ago.

At present, that quota capacity amounts to roughly 5% of the assets benchmarked to FTSE’s emerging markets indexes, confirmed the FTSE spokeswoman.

WEIGHTING WILL INCREASE
Assuming the total assets benchmarked to FTSE’s emerging markets indexes are held constant, that weighting will increase in line with continued expansions of the QFII and RQFII programs, and “merge seamlessly” with the standard FTSE emerging markets indexes when China A shares – a roughly $7 trillion market at present – meet the firm’s requirements for full inclusion, according to the news release. The spokeswoman said FTSE expects the entire A shares market to be eligible for inclusion within two to three years.

In the news release, Mark Makepeace, the chief executive of FTSE Russell, said “The transition to include A Shares in global portfolios is now beginning and we will support this transition while ensuring that all users of our global benchmarks have sufficient time to manage the change.”

Rival benchmark index provider MSCI Inc. has said it will announce its decision on whether or not to include an initial fraction of the A shares market in its indexes on June 9.

Douglas Appell is a senior reporter at sister publication Pensions & Investments.