Foreign investors play FTSE with Chinese stocks, plough US$6.3 billion back into mainland stock market
- Global fund managers buy stocks worth 7.3 billion yuan through stock connects on Friday
- Inclusion in FTSE Emerging Index to be implemented in three steps
Foreign investors have ploughed 43.3 billion yuan (US$6.3 billion) into mainland China equities this month in anticipation of the inclusion of these stocks in the FTSE Emerging Index, which came into effect on Monday morning, in a turnaround from a massive sell-off in May.
Global fund managers rushed to buy Chinese shares on Friday, the day before their inclusion became official, snatching stocks worth 7.3 billion yuan through the stock connects in Hong Kong to reflect the change in weighting of the FTSE index. This led to the biggest amount of purchasing in about two weeks.
A thaw in the US-China trade war and the prospect of policy loosening by Beijing may have boosted the return of foreign funds, but the inclusion by UK-based index compiler FTSE Group, which trades as FTSE Russell, is a major driver.
More than 1,000 Chinese companies – from big caps to medium and small caps – have been added to the gauge for the first time, and will be tracked by global funds with assets worth US$140 billion, according to FTSE.
The inclusion of Chinese stocks by FTSE follows on the footsteps of an inclusion by global indices compiler MSCI, which added these equities last year and doubled their weightage last month.
MSCI begins process to double weighting of Chinese stocks in benchmark gauges
“The inflows were similar to that of the May MSCI rebalance for a majority of the trading session, before inflows surged in the last 30 minutes to finish with US$1.1 billion on the day – 33 per cent higher than MSCI,” Chris Yung and Jason Lui, analysts at French bank BNP Paribas, said in a report on Monday.
The inclusion will be implemented in three steps, with the next two to take place in September and March 2020, FTSE said. Upon completion, Chinese stocks will represent 5.5 per cent of the FTSE Emerging Index, drawing inflows of US$10 billion from passively managed funds, it said.
“The drivers for this are clear. Over the past decade, China has made great strides in opening up its market as part of an extraordinary economic transformation over the last 40 years,” said Jessie Pak, managing director for Asia at FTSE. “Like any emerging market, development is not linear and we will measure progress at the completion of each phase.”
Can the world’s investors trust China’s wild stock markets?
Chinese equities will account for 3.3 per cent of the MSCI Emerging Markets Index in November, after a three-step plan that will quadruple their representation from an initial stage.
Foreign investors sold a combined 53.7 billion yuan worth of Chinese stocks in May, the biggest monthly outflow since December 2016, as the Trump administration suddenly increased tariffs on imports from China and data signalled a slowdown in the mainland Chinese economy.
