Skip to main content

You are here

Blog Listing Page

FTSE Russell’s China A Shares pathway: The phased approach

By Sandrine Soubeyran, director, research and analytics

One development that emerging market equity investors will be watching with interest this year will be the inclusion of China A Shares in FTSE Global and emerging market indexes.

During 2018, we evaluated the China A Share equity market against our Country Classification process and announced in September that China A Shares available via the Northbound Stock Connect program—the mainstream equity class in that country—would be included in our Global and Emerging Market Index.

As with all our country classification changes, we made this announcement well in advance of implementation to give market participants time to adjust. We will begin including China A Shares securities into FTSE GEIS from June 2019. To assist index trackers in their ability to efficiently replicate the underlying benchmark change, we will implement the inclusion over three separate tranches (Phase 1) through to March 2020. After each tranche, FTSE Russell will seek market feedback on the efficiency of the implementation and to evaluate the ability of the market to absorb the additional assets before proceeding with the next tranche.

Stock inclusion will be calculated using 25% of investable market capitalization of the eligible large, mid and small cap designated securities from the FTSE China A Stock Connect All Cap Index (currently around 1,250 stocks). As the chart below shows, upon completion of the Phase 1, China A Shares are expected to constitute c. 5.5% of the total FTSE Emerging Index, representing initial net passive inflows of $10 billion of assets under management.  

Source: FTSE Russell as of August 2018. Future weights based on market assumptions that may ultimately be incorrect. Please see the end for important legal disclosures.

It’s vital to recognize that FTSE Russell formally reviews country classifications within its FTSE Global Equity Index Series (FTSE GEIS) using a comprehensive, transparent and consistent methodology, which verifies that important criteria for market efficiency and quality are met. Ensuring that those investor conditions are achieved lies at the foundation of our country classification evaluation process. China A Shares classification as Secondary Emerging Market was a result of constructive engagement with Chinese regulators, stock market officials and international investors/custodians.

So considerations for further inclusion of further China A Shares after Phase 1 will take place within that framework: specific questions could include whether the size of the next phase should be based on any increase to the quota sizes, whether phase 1 should be repeated (i.e., taking the total inclusion factor to 50%); and whether stocks outside of Stock Connect routes should be included.

But this is unlikely to be the end of the process: in time, China's listed equity markets are likely to dwarf the rest of the emerging markets. According to our research, China shares could in time form half of all stocks in FTSE Emerging Markets, with A Shares, and ex A Shares (B, H, N, P, Red and S Chips) providing a quarter each. But whatever happens will be determined using an agreed, transparent process, and asset owners and managers will be made aware of changes a long time in advance.

For more on the China A process, please read the research paper, the Q&A, or refer to our Country Classification page. Sign up for our weekly blog update.

 

---------------

© 2019 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”) and (7) The Yield Book Inc (“YB”). All rights reserved.

FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®”,  and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent,  FTSE FI, YB. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.

All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of the FTSE Russell Indexes or the fitness or suitability of the FTSE Russell Indexes for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell Indexes is provided for information purposes only and is not a reliable indicator of future performance.

No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained in this document or accessible through FTSE Russell Indexes, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.

Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.

This publication may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and/or their respective licensors.

Blog Listing Page