March 6, 2013 10:22 am

China equities on track to go global

Mainland Chinese shares are set to join global equity benchmarks as early as three years’ time, FTSE’s chief executive has forecast, raising the prospect that international investors will have to shift billions of dollars into the market.

Reforms by Beijing have had a “big impact” on how investors view mainland markets, said Mark Makepeace, FTSE chief executive, who is in Asia to “kick off a process” he believes will lead to Chinese equities joining his company’s global indices.

“If they continue with the current policies at the current pace ... I would expect China to be eligible over the next three to five years,” he told the Financial Times on Wednesday. “Investors need to start thinking about the issue now, and draw up plans in the next 18 months.”

Mainland equities are largely excluded from global indices because of restrictions on access for international funds under China’s qualified foreign institutional investor quota system. Just 1.3 per cent of mainland equities – known as A-shares – are owned by non-Chinese investors.

Chinese authorities have been actively seeking a greater role for overseas funds in the hope they can help make equities a trustworthy investment alternative to the property market for the country’s savers.

The China Securities Regulatory Commission last year accompanied officials from the Shanghai and Shenzhen stock exchanges on a global roadshow to raise interest in Chinese markets.

The CSRC has also lowered the barrier to entry for foreign asset managers applying for QFII licences. Guo Shuqing, CSRC chairman, said he would like to see foreign investor quotas increased tenfold this year.

The Shanghai stock exchange has directed listed companies to return 30 per cent of profits to shareholders via dividends as part of the effort to encourage longer-term investment.

The inclusion of mainland China in global benchmarks, such as those compiled by the FTSE or rival MSCI, was “long overdue”, said Howhow Zhang, head of research at Z-Ben Advisors.

If they continue with the current policies at the current pace ... I would expect China to be eligible over the next three to five years

- Mark Makepeace, FTSE chief

“The current market will have to go through some fundamental changes to accommodate a major group of foreign investors,” Mr Zhang said. “[But] I wouldn’t be surprised at all if [it happens] in the next three to five years.”

Based on FTSE’s market projections, China would account for roughly 7 per cent of its Global All-Cap index, making it the second-biggest market in the benchmark behind the US.

Chinese equities listed offshore in Hong Kong and New York, in addition to the small foreign-owned portion of A-shares, currently make up about 2 per cent.

The challenge of migrating China into a global index would be “much bigger than anything we’ve faced before ... due to its sheer size”, Mr Makepeace said, adding that he expected a formal dialogue with Chinese regulators to start within the next 12 months.

If A-shares were added to the FTSE emerging markets benchmark, China would account for 40 per cent of the index, although Mr Makepeace said that would likely rise to more than 50 per cent by the time China is eligible for full inclusion.

Asset managers and exchange traded funds that track global and regional indices would be forced to buy A-shares were they added by the index compilers.

Shanghai and Shenzhen A-shares have a combined market capitalisation of $3.7tn, larger than the FTSE 100 or Japan’s Topix index.

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