The widely anticipated Shanghai-Hong Kong Stock Connect debuted Monday. Aimed at increasing securities trading between Hong Kong and mainland China, the Stock Connect program is also part of China’s efforts to further liberalize its sprawling financial markets to foreign investors.
The Stock Connect program is a step in the right direction, but not enough to merit a promotion of China’s A-shares equities to emerging markets status, according to index provider FTSE Group.
“However, despite the widespread euphoria surrounding the program, a number of restrictions remain present which should continue to preclude China’s A-shares from the FTSE Global Equity Index Series (GEIS),” said the index provider in a note out Wednesday.
FTSE, the index provider for over 100 U.S.-listed exchange traded funds, notes quotas placed on foreign investors’ access to A-shares stocks is one reason to not expect a near-term emerging markets promotion for A-shares stocks. The index provider also pointed out that while the debut of stock connect went smoothly, once foreign investors hit their allotted quote of $2.1 billion, they lost access to more shares just before 2pm local time.
U.S. investors’ thirst for A-shares ETFs has been so strong that on two separate occasions over the past 70 days, Deutsche Asset & Wealth Management has been forced to announce limited creations for the Deutsche X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR) and the Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund (NYSEArca: ASHS) because that heavy demand forcing the two ETFs to bump up against their respective Renminbi Qualified Foreign Institutional Investor (RQFII), which allows the funds to purchase A-shares equities. [Rushing to A-Shares ETFs]
As long as FTSE does not elevate A-shares stocks to emerging markets, those equities will be excluded from well-known, heavily traded ETFs that benchmark to FTSE indices, such as the iShares China Large-Cap ETF (NYSEArca: FXI) and the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO). FXI is the largest China ETF by assets while VWO is the largest emerging markets ETF.
FTSE is not the only index provider to pass on promoting A-shares. In June, FTSE rival MSCI (NYSE: MSCI), also highlighting issues with the quota schemes, decided against adding A-shares to its emerging markets benchmark. In July, S&P Dow Jones Indices decided not to include China A-Shares in any S&P Dow Jones Indices’ global benchmarks at, including the S&P Global BMI, S&P/IFCI Composite, Dow Jones Global Index, and Dow Jones Global Total Stock Market Index. [S&P Denies A-Shares EM Promotion]
In early June, FTSE introduced a series of indices that will allow market participants to include China A-shares in global indices at a time of their choosing.
“FTSE will continue to consult and engage with market participants and Chinese authorities to monitor developments and gauge progress.Until restrictions are lifted further and the A-shares market meets the required criteria, the FTSE Global R/QFII Index Series represents an interim indexing solution. The series is developed to provide market participants with benchmark options, such that they can choose their China A-shares index allocation based on differing quotas or views on the market,” said the index provider.