Emerging onto the global market

By Wang Mingjie (China Daily) Updated: 2015-06-29 07:57

The allocation of China A shares is based on aggregate QFII/RQFII approved quotas, with the allocation of A shares to FTSE's global benchmarks reflecting the accessibility available to international investors.

"From the investors' point of view, the mechanism will allow them to expect the proportional increase of the A-shares allocation in the benchmark based on up-to-date approved quota information," said Jing Hu, investment manager at Arbuthnot Latham & Co, a private bank in London.

Davis added: "Any weighting has to be consistent with the total amount of investment allowed by foreign investors through the QFII/RQII allocations.

Justin Stewart, co-founder of Seven Investment Management

"If the allocations were used up in full before funds could match the index weightings, there would obviously be a problem."

Andy Seaman, partner and chief investment officer at Stratton Street, a London-based fund management and advisory company, said that although access to China's capital markets is still largely controlled by quotas, these are likely to be phased out.

Whether to add China A-share stocks to global indexes has been a major challenge for index providers. A-share inclusion could force many active and passive fund managers to pour billions of dollars into the Chinese stock market, with the potential of drawing large sums away from other small emerging markets.

"In the short term, the impact may be limited, but in the long run, a reallocation to China will inevitably lead to reduced allocations elsewhere, and these markets may suffer more negatively from reduced portfolio allocations than China may gain from increased reallocation by investors," Seaman said.

Industrial experts and analysts say the inclusion will bring opportunities to the Chinese financial market, as well as potential challenges.

For overseas investors in China the future is exciting, but not without risks.

"The direction of reform in China makes clear that in order to transform the economy from its old-fashioned supply-led model to a more sustainable demand-and consumption-driven base, China needs foreign capital and needs to address some of its historic imbalances," Davis noted.

Justin Stewart, co-founder of Seven Investment Management, says FTSE's move will help increase liquidity in Chinese stock markets, adding: "More inflow will help better price formation and thus create greater confidence in the prices being seen. Also, more inward investment will justify more company and market research, which can only improve the market by increasing confidence.