FTSE inclusion of A shares a step in right direction: analysts
China will achieve its goal of long-term capital dominating the A-share market, a government official said on Thursday.
The remark, made by Fang Xinghai, vice chairman of the China Securities Regulatory Commission, came shortly after global index provider FTSE Russell announced the inclusion of A shares in its global equity benchmarks in a three-stage phase starting from June 2019.
Speaking at the FTSE Russell press conference, Fang said that he had talked to many overseas investors who said they weren't concerned about the stocks' short-term performance, and were more interested in their long-term value.
Mark Makepeace, CEO of FTSE Russell, told the Global Times on Thursday that inflows of institutional money into the domestic stock market will help build a long-term investment trend.
"I would expect that 30 percent of the funds flowing into A shares will be passive, and they are the long-term holders of the market," he said.
Experts said that only when institutional investors constitute the majority of investors in the market can there be a culture of long-term, value-oriented investment in the Chinese stock market.
But this is still not the case in the domestic market, in which about 90 percent of the trading is conducted by individual investors who are mostly interested in gaining quick returns, said Dong Dengxin, director of the Finance and Securities Institute at the Wuhan University of Science and Technology.
"If a stock market is mostly made up of speculative investment capital, it can't develop in a stable and healthy manner. I think the government should not only introduce long-term overseas investors through opening-up, but should also nurture domestic institutional investors," he told the Global Times on Thursday.
The two main bourses in Shanghai and Shenzhen have seen sluggish performance for several years, having plunged from a peak in mid-2015.
On Thursday, the Shanghai Composite Index closed at 2,791.77 points, down 0.54 percent, while the Shenzhen Component Index dropped by 1.02 percent to 8,334.75 points.
Analysts also said that the inclusion of A shares by FTSE Russell will bring incremental capital inflows to the mainland market, which will offer an important boost.
According to Makepeace, FTSE Russell will complete the inclusion in three stages ending in March 2020, and one-fourth of the A-share stocks available to overseas investors will be included in its benchmarks.
He told the Global Times that FTSE Russell chooses stocks with a minimum size of $80 million and relatively active trading.
According to Fang, the inclusion by FTSE Russell will trigger initial net passive inflows of $10 billion of assets under management.
This will only be a start and further capital inflows will follow. According to FTSE Russell, after the three-stage inclusion ends, the A shares' weighting in its indexes may be increased from 5.5 percent to a level of about 26 percent eventually.
Xi Junyang, a finance professor at the Shanghai University of Finance and Economics, told the Global Times that international index providers' inclusion of A shares will increase the scale of inflowing capital chains, which will boost domestic investors' confidence and improve liquidity in the market.
"But I don't think that such incremental capital can fundamentally change the market's trend. Certainly it can't directly turn the bear market into a bull market," he explained on Thursday.