FTSE Russell, the world’s second-largest index company, included A-shares in its flagship index on Sept. 27th. Prof. Wang Cong, Associate Director of Shenzhen Finance Institute (SFI), asserted in an interview with CBN (Chinese Business Network, 第一财经) that it would not have much impact in the short run. “The internationalization of A-shares has been accelerated which will lead to higher requirements toward regulations,” he said.
The inclusion of A-Shares will begin from June, 2019, which constitutes 5.5 percent of the company’s key emerging markets index and accounts for 0.57 percent of the FTSE Global All Cap Index. This accelerates the internationalization of A-shares. Will it change the current trend and style of A-shares’ development?
“The stock market trend should be related to the fundamentals of the economy and the performance of the listed companies. However, joining the FTSE Russell Index may change the investment style of the A-share market. Value investing will be more preferable by investors,” he said.
The opening-up of China’s capital market accelerates foreign traders’ entering progress, which will bring opportunities. From the perspective of investment philosophy, the inflows of foreign capital, especially from long-term investors, will make domestic investors shift to value investment and blue-chip stocks as well as improve corporate governance. On the other hand, indexes such as MSCI and FTSE Russell are the benchmark of index funds and ETF funds. “These funds grow very fast in some developed markets, especially in the U.S. market. The performance of ETF funds is actually not worse than that of active funds and the cost of ETF funds is comparatively lower for investors. Therefore, the development of ETFs in the A-share market will have a broader prospect,” he said.
Recently, another large index provider, MSCI, has decided to propose a higher weighting of A-shares on its index from 5% to 20%.
“MSCI and FSTE considered to include A-shares into the emerging market index before and two points were the most concerning at that time: 1) whether the listed companies in A-shares can really protect the interests of small and medium-sized investors from the perspective of corporate governance and 2) trading rules.”
Regulatory authorities should focus on the corporate governance of small and medium-sized investors in the future. Besides, China’s stock market fluctuated abnormally in 2015. About one-third of listed companies were suspended from trading. After the suspension, once investment funds are redeemed, investors cannot sell them. The China Securities Regulatory Commission has taken some measures and has made great progress. “I think this is also one of the directions for continuous efforts in the future,” Prof. Wang Cong said.