FTSE Group expects to include China’s A-shares into its global benchmarks in the next three to five years as the country opens up its markets further and undertakes financial deregulation.
“It depends on the pace of China, but we don’t expect it will take too long as the Chinese government has understood what kind of infrastructure and support foreign investors need,” FTSE Asia managing director Jessie Pak told EJ Insight in an interview.
China’s A-share market is yet to pass the test criteria for secondary emerging market status under FTSE’s country classification. The nation has failed in stock market regulatory framework, capital mobility and settlement and clearing, and there are also concerns on its taxation rules. That said, Pak believes things will improve and that the shares can join the global benchmarks in three to five years.
On June 10, MSCI Inc. — another provider of investment decision support tools, including indexes — decided not to include A-shares into its Emerging Markets Index as part of this year’s review. The decision was based on feedback received from international institutional investors on constraints related to the QFII and RQFII quota systems.
Meanwhile, STOXX Ltd., a Zurich-based compiler of global benchmarks, said on June 18 that Hong Kong H shares have been included in all its regular China indices, but mainland-traded A shares made it to only one index — China A index — because of poor investor feedback.
The China market clearly has many shortcomings, but that has not deterred FTSE from expanding its footprint there. The company recently announced a new series of indexes, known as the FTSE Global R/QFII Index Series, which will allow market participants to include China A-shares in global indices at their discretion.
Pak said the group may refine its index product and add Hong Kong Stock Connect’s quota into the R/QFII series, if the platform runs smoothly and becomes popular among institutional investors.
“The quota practice is different from that in the R/QFII. In R/QFII, a financial institution will get its own quota for trade while in Stock Connect it might not be able to get the quota based on first come first serve basis; we need to see if funds are available to use this channel before considering adding Stock Connect quota into our R/QFII quota index,” she said.
Meanwhile, FTSE Group is also preparing to launch its first-ever Chinese onshore bond index by early fourth quarter. The company had earlier scheduled the launch in June, but had to delay the initiative. “We are still fine-tuning the methodology of choosing bonds,” Pak said.
It will compile a broad-based, tradable index that factors in as many as 100 sovereign notes listed on the mainland, before developing it into a range of sub-indexes.
“As the bond market is not very mature at this moment, only 20 percent of the government bonds in the onshore bond market are actively traded. So, not many of their prices can be quoted and evaluated,” Pak said.
China’s bond market had been closed to outsiders over the years. It wasn’t until 2012 that the country opened the interbank bond market, which trades over 90 percent of the nation’s debt, to qualified foreign institutional investors (QFIIs). Before that, foreign investors were limited to exchange-traded bonds.
Prior to the upcoming onshore bond index, FTSE had launched an offshore dim sum bond index series with Bank of China (Hong Kong) late last year.
The company is seeking to diversify its index products to bonds so that it can ward off competitors.
Currently, more than 80 percent of its index products are on equity side and the contribution is even larger in Asia Pacific region.
“We are going to issue more bond products this year, including a Chinese onshore bond and an Australian bond,” Pak said.
In April this year, FTSE Group, together with Toronto’s Stock Exchange’s fixed-income index business PC-Bond, acquired the indices business of MTS Group, whose benchmarks track the performance of the largest and most widely traded government issued securities in European bonds.
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