FTSE on Tuesday announced the launch of two “transitional indexes” allowing institutional investors to add an initial increment of China A-shares exposure to their emerging markets benchmarks.
A London-based FTSE spokeswoman said the FTSE Emerging Markets China A Inclusion index would allow investors to focus their A-shares investments in large-cap stocks, while the FTSE Emerging Markets All-Cap China A Inclusion index would cover a full range of stocks on the mainland.
Those transitional indexes are separate and distinct from FTSE's standard emerging markets and global indexes. A FTSE news release said executives will “consult widely with institutional investors prior to determining the timing of the inclusion of A shares” in its standard indexes.
The weight of A shares in FTSE's transitional indexes will be determined by the combined total of quotas awarded under China's qualified foreign institutional investor program and the renminbi qualified foreign institutional investor program. Currently, those quotas amount to roughly 5% of the market capitalization of FTSE's new emerging markets indexes, the spokeswoman said. The weighting of A shares in those indexes will rise in line with the increase in quotas.
Assuming the total assets benchmarked to FTSE's emerging markets indexes are held constant, that weighting will increase in line with continued expansions of the QFII and RQFII programs, and “merge seamlessly” with the standard FTSE emerging markets indexes when China A shares — a roughly $7 trillion market currently — meet the firm's requirements for full inclusion, the news release said. The spokeswoman said FTSE expects the entire A-shares market to be eligible for inclusion within two to three years.
“The transition to include A shares in global portfolios is now beginning, and we will support this transition while ensuring that all users of our global benchmarks have sufficient time to manage the change,” said Mark Makepeace, the CEO of FTSE Russell, in the news release.
Rival benchmark index provider MSCI has said it will announce its decision June 9 on whether to include an initial fraction of the A-shares market in its indexes.