FTSE Russell's A-share inclusion to attract $10b foreign capital

The A-share inclusion plan implemented by UK-based index provider FTSE Russell will bring in an estimated $10 billion in net passive foreign inflows, including some $2 billion in June, an analyst said. The plan takes effect from the closing bell on Friday.

Under the central government's strategy to deepen supply-side structural reforms, the China Securities Regulatory Commission will promote those reforms and the opening-up to facilitate overseas investment entering China's capital market, Fang Xinghai, vice-chairman of the CSRC, said at the launching ceremony of A-shares' inclusion in the FTSE Russell.

The CSRC is looking forward to bolstering cooperation with FTSE Russell and other international index compilers which would propel the opening up of China's markets, Fang said.

The CSRC will also continue to strengthen the supervision and cross-border cooperation in those financial markets, he added.

Wholly owned by the London Stock Exchange Group, FTSE Russell announced the China A-share inclusion plan as part of its 2018 FTSE Equity Country Classification Review. The ChiNext stocks, China's Nasdaq-style board, was also included. FTSE Russell is the first international index provider to announce the inclusion of ChiNext stocks in their global index.

The additions will be implemented in three stages. Phase 1 begins from the closing bell on Friday and ends in March 2020. Upon completion of the first phase, China A shares will represent approximately 5.5 per cent of the total FTSE Emerging Index.

"Foreign investors as a group have surpassed insurers as the largest holder of A shares and with the help of the weight increase of various indexes, are likely to rival domestic mutual funds soon," said Thomas Fang, head of China Equities at UBS. "We expect the largely retail-driven A-share market to become more institutionalized over time."

Fang said data from the People's Bank of China showed foreign investors held 1.68 trillion yuan ($244 billion) of A shares at the end of the first quarter of 2019, accounting for 3 percent of the total market cap and 7.4 percent of the free-float market cap of the onshore equity market, which are up from 0.8 percent and 2.3 percent in November 2015, respectively.

In terms of individual stocks, Fang said foreign investors are attracted to large-cap and liquid stocks which provide higher return on equity and certainty in their earnings.

Stocks on the Chinese mainland closed higher on Friday. The benchmark Shanghai Composite Index rose over the 3000-point resistance level to finish at 3001.98 points, up 0.5 percent for the day. The Shenzhen Component Index closed 0.87 percent higher at 9214.27 points.