Interest in A shares strong despite FTSE cut

Though minor adjustments will be made in FTSE Russell products due to external uncertainties, international investors' long-term interest in Chinese companies, given their growth potential, remains unchanged, said experts.

The UK-based index provider FTSE Russell, which is owned by the London Stock Exchange Group, said on Friday that it will remove shares of eight Chinese companies from certain products. As the index compiler explained, the latest action is mainly based on feedback from index subscribers and other stakeholders after the US government said on Thursday that it was restricting the purchase of shares of some Chinese companies that are listed in the US, due to their alleged military connections.

The eight companies include China Railway Construction Corp, China Spacesat and surveillance company Hangzhou Hikvision. The index provider plans to remove the companies on Dec 21 from its FTSE global equity indices and the FTSE China A Inclusion index. It said the treatment of the said eight companies remains under review in other indexes including FTSE China and China A products.

Yu Fenghui, an independent economist, said categorizing the eight Chinese companies as ones with military connections is a US tactic to intimidate China. If the US government does not change its mentality toward Chinese technology companies, it will hurt the interests of both countries, he said.

Dong Dengxin, director of the Finance and Securities Institute, which is part of the Wuhan University of Science and Technology in Hubei province, said the Chinese companies included in the list are quite competitive in their respective sectors. International capital and overseas institutions are well aware that the Chinese companies currently sanctioned by the US government are indeed good investment targets. Therefore, investors' understanding of the A-share market will remain unchanged.

Although US investors may miss the chance of directly investing in the Chinese companies blacklisted by the US government, there are still other investment channels, such as the qualified foreign institutional investor program, as well as the stock connect programs between the Chinese mainland and Hong Kong, said Dong.

Wang Delun, chief strategist of Industrial Securities, said foreign investors have a positive outlook on Chinese industry leaders and growth enterprises in the long term. There is some 1 trillion yuan ($153 billion) of foreign capital on the A-share markets and foreign investors have come to realize the growth potential of A-share listed companies and the increasing return on equity of these companies.

Analysts from Huaxi Securities said in a report released on Monday that the weakening major economic indicators in the US due to the COVID-19 epidemic, combined with the raised expectations for further fiscal expansion, have exerted more downward pressure on the US dollar. As a result, commodities priced in the US dollar have been valued higher while global capital is flowing at a faster pace into non-US markets, especially the A-share market.