In May, FTSE Russell announced the start of its transition to include China A-shares in its widely followed global benchmarks, with the launch of the new FTSE China A Inclusion Indexes. The initial weight of A-shares was 5% with the potential of up to 32% when more international investors come in. At the end of October, Vanguard announced that its Emerging Markets Stock Index Fund would start to track the FTSE Emerging Markets All Cap China A Inclusion Index and increase the investment flood into A-shares.
What’s more, the increasing investment inflow is not the only pattern of the Chinese A-share’s globalization. On November 2, MSCI began to add overseas-listed Chinese shares to its emerging market indexes this month. Thus, Alibaba (BABA) is estimated to become the sixth largest-weighted share in MSCI China Index and 1.6 billion dollars would flow into the company. This movement would eventually lead to mainland-listed stocks to find their way into global equity portfolios. Specifically, the inclusion of ADR stocks will give foreign investors greater exposure to the growth of Chinese consumption-sector companies. In the mean time, they could adjust their portfolios to avoid the intervention of A-shares from Chinese government with passive investment.
To some degree, FTSE and MSCI’s movement of including A-Shares in their ETFs has conflicting interest. On one hand, foreign investors could enjoy the convenience of indirect investment in Chinese mainland stocks, with a better portfolio structure of ADR stocks like BABA, BIDU and JMEI. On the other hand, the inclusion of A-shares will increase the volatility of certain emerging market and Asian indexes and give asset managers more complex asset allocation decisions.
This year, with lower-than-expected GDP growth and weak manufacturing data, China has been questioned repeatedly about their economic situation and stock valuation. Under this circumstance, A-shares need to gain more liquidity and get rid of 'national control'. For China, the globalization of A-shares is a strong incentive and aims to attract more funding inflow. Nevertheless, when we consider the larger issue about whether or not RMB can be included into the SDR basket, we know China still has a long way to go.
--Sujia (Mike) Zhao