Major index providers are increasing China's weight within their emerging markets indexes
But given the bear market and trade war, few investors are buying
Index providers MSCI and FTSE Russell are taking steps to increase the weighting of China shares in their benchmark indexes, but the move is expected not to have an immediate effect to divert significant flows into A-shares ETF products with the unstable market sentiment in China.
FTSE Russell announced in late September to include Chinese stocks in the FTSE Emerging Index and the FTSE Global All Cap Index starting from June 2019.
Meanwhile, MSCI is planning to quadruple A-shares' weighting in the MSCI Emerging Market Index to 3.36% from the current 0.8%, a few months after the index provider incorporated Mainland equities in its EM index series through a two-step process in June and August.
According to Nicholas Yeo, head of China equities at Aberdeen Standard Investments, the move is widely expected with the significant size of Mainland stock market.
"We don't see why index providers wouldn't include A-shares or increase China's weighting as long as the Chinese government continues to improve regulations like tightening up trading suspension, widening market access and encouraging companies to improve ESG standards," he notes.
However, the impact of the FTSE Russell EM index inclusion on the flows into related ETFs is expected to be less significant compared to the MSCI's inclusion.
MSCI estimates that its proposed increase in Chinese equity proportion would attract about US$66 billion from passive and active funds.
By contrast, Vanguard is currently the biggest ETF client for FTSE Russell's EM indexes. The underlying index used by Vanguard FTSE Emerging Markets ETF has already included A-shares. As such, the FTSE Russell EM index inclusion is unlikely to draw significant capital flows, says a Hong Kong-based ETF industry practitioner, speaking on condition of anonymity.
Investors are in no rush to buy China A-shares, given the ongoing trade war and bear market. The trend is highlighted by the fact that the benchmark CSI 300 Index had fallen as much as 15.8% since January to end-September.
Although institutional investors hold a positive long-term view on the outlook of Chinese equities, ETFs are not the only option for them to gain access to A-shares with the availability of various cross-border investment channels such as Stock Connect programme, the practitioners says.
But given A-shares would be added to all sub-indexes under FTSE All Cap Index, it is expected to bring in around $10 billion inflows into A-shares market in the longer term, he notes.
Joanne Siu, ETF sales director of Samsung Asset Management (Hong Kong), points out China has become an important part in many international institutional investors' portfolio that the upward adjustment of A-share weighting in global emerging market benchmarks will lead them to increasingly use ETFs to rebalance their asset allocation.
"International investors will look at the ETFs tracking broad-based, highly represented A-shares indexes in Hong Kong rather than thematic or sector ETFs to raise their exposure to China," Ms. Siu points out.
On the product side, ChinaAMC MSCI China A Inclusion Index ETF and CSOP MSCI A-share International ETF are currently the only two products available in Hong Kong tracking the A-shares constituents in MSCI EM Indexes, whereas there have been more than 10 homogenous MSCI A-shares ETFs listed in China with many similar products in the pipeline.
China's ETFs market capacity is large enough for many MSCI A-shares ETFs, but the ETF market in Hong Kong has no room for these "me too" products, says Ms. Siu, noting that Samsung (Hong Kong) will not launch any broad-based China index ETFs because of the competitive market landscape in Hong Kong.
"We will rather focus on developing thematic and commodity ETFs going forward," she notes.
Samsung (Hong Kong) recently launched the Samsung CSI China Dragon ETF, which tracks tracking Chinese large-cap internet companies listed in the Mainland and overseas.