China must stay alert to the possibility of a severe market disruption in case the trade war deteriorates further, as a repeat of the 2015 sell-off will shatter the confidence of international investors, said Jessie Pak, managing director for Asia at FTSE Russell.
“The trade war is high up [there] … [but] it does not necessarily make the Chinese market scary to international investors because the market is volatile everywhere,” Pak said, adding that any massive disruption and suspension of shares from trading similar to four years ago will drive international investors away.
A stock market rout that started in June 2015 wiped out as much as US$5 trillion in market capitalisation within weeks, forcing Beijing to pump at least 1.5 trillion yuan (US$219 billion) of funds to shore up the market. Regulators too had to step in and allowed suspension of trading in more than 1,300 listed firms – more than half the listed total at the time – to prevent further losses in their value.
The move arrested the fall of stock prices, but also trapped investors, as they could not make a timely exit.
The benchmark Shanghai Composite Index on Tuesday stood at 3,021.20, nearly 42 per cent off its peak of 5,166.35 reached on June 12, 2015.
FTSE Russell is in the process of including 1,093 A shares into its global indices. The first phase of inclusion was completed on June 24, and the second is due to be finished by September 23.
Global index compilers are increasingly adding China’s A shares into their indices, as Chinese regulators have made it easier for foreigners to buy the shares via the Shanghai and Shenzhen stock connect programmes with Hong Kong and have scrapped restrictions on fund repatriation and lock-up periods. As a result overseas investors have increased their exposure to mainland listed shares.
MSCI added A shares last year and doubled their weightage in May.
Pak said FTSE’s programme has been proceeding smoothly. By March next year when the third tranche is completed, A shares will represent 5.5 per cent of the FTSE Emerging Index.
That will bring along capital inflows of around US$10 billion into the A-share market, she said.
FTSE said in June the gauge will be tracked by global funds with assets worth US$140 billion.
Asked about the effect of the yuan’s devaluation on overseas investors’ view of Chinese stocks, Pak said that “it will hardly affect the long-term investors who already track the FTSE Emerging Index”.
She added that the concern for US dollar investors would be that even if the share price goes up, the depreciation would eat into their profit.
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More than the yuan’s depreciation, Pak said investors may fear the introduction of stringent capital control measures to prevent capital flight in the event of the currency weakening further
“To be a strong country, and to be seen on a global stage, you need to open further, and need to meet the global requirements that cannot be bent.
“China is changing more rules to accommodate the global investment world.”
Pak said they will have two important reviews with institutional clients next year, in June and September. The focus will be on the efficiency and flexibility of trading A shares, particularly ease of settlement, exchange of currency and profit repatriation, and the outcome of the review results will determine how the weighting of A shares in the benchmark indices will be rebalanced.
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