The rebound in emerging market stocks in 2015 and much of this comeback can be attributed to the performance of China’s equity markets. Through May 25 of this year, the FTSE China 50 Index has returned 22.0%. The FTSE China 50 Index is comprised of 50 of the largest and most liquid Chinese stocks (H Shares, Red Chips and P Chips) listed and trading on the Stock Exchange of Hong Kong.
FTSE China 50 Index
Source: Financial Times as of May 22, 2015. Past performance is no guarantee of future results.
Even more noteworthy has been the performance of the FTSE China A Index, which has risen 51.4% so far in 2015. The FTSE China A Index represents the performance of mainland A Shares—securities of Chinese incorporated companies that trade on either the Shanghai or Shenzhen stock exchanges—that are available to international investors via quota schemes.
One of the major catalysts for these returns is China’s commitment to economic reforms. These include making China’s financial markets more accessible to overseas investors and promoting the yuan’s role as a leading international currency. The yuan is playing an increasingly important role in global trade – it was the currency for nearly one-quarter of all cross-border transactions in 2014, and China is promoting the yuan as a global reserve currency, joining the ranks of the dollar, euro and yen.
At present, foreigners have limited access to mainland China A-shares through quota-based qualified investor programs, but this has been changing with new market reforms intended to ease restrictions. For example, China launched a cross-border exchange program last November that links the Shanghai and Hong Kong exchanges and allows Hong Kong investors to trade eligible mainland shares.
FTSE has recently launched two new China A Inclusion Indexes to help market participants prepare for easier access to this market as restrictions are relaxed. The inclusion of A-shares in global indexes could potentially lead to huge inflows of capital to China’s markets from overseas investors. Existing R/QFII quota-based schemes limit China to a 4.8% weighting in the FTSE Emerging China A Inclusion Index, but if the quota restrictions are to be removed in the future China A-shares stocks could represent nearly a quarter of the broader emerging markets inclusion index.
FTSE Russell CEO Mark Makepeace has indicated he believes that China’s inclusion in global benchmark indexes may be no more than three years away. If these expectations should materialize, China would likely not only comprise a large share of emerging market indexes, but could also quickly grow to become as much as one-fifth of global index portfolios.
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