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Smart beta index provider shuns China A-shares citing trading limitations

Shanghai, China

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A leading smart beta index provider has opted not to add China A-shares to its benchmarks, despite recent high profile moves by MSCI and FTSE Russell.

ERI Scientific Beta cited restrictions to the use of derivatives, limited capacity for rebalancing and the high number of stock-trading suspensions as reasons why it had decided against adding access to the burgeoning onshore market for Chinese equity.

Instead, the provider said it had created a “dedicated and independent” group of 100 constituents representative of the Chinese equity market to use in its indices.

Noël Amenc, CEO of Scientific Beta, said: “An investment universe that is dedicated to smart beta needs not only to be representative, but also investable and liquid. The exposure to China in an index can be controlled by creating a China block – not necessarily through an inordinate increase in the number of Chinese stocks, to the detriment of their liquidity.”

The provider highlighted that derivatives products linked to A-shares needed to be “pre-approved” by Chinese regulators, and could often be restricted by local stock exchanges.

Even after the China Securities Regulatory Commission quadrupled the daily quota for trades between Hong Kong and the Shanghai and Shenzhen exchanges in April, Scientific Beta said there would still be a risk of breaching the limit when rebalancing indices.

As well as introducing the “block” of representative China stocks, ERI Scientific Beta has added American Depositary Receipts (ADRs) to its universe of eligible assets. ADRs are US-listed assets representing shares in non-US companies.

These changes, the company said, “provide exposure to China while ensuring a good level of liquidity”.

Last month MSCI proposed to quadruple the weighting of China A-shares in its flagship MSCI Emerging Markets index to 3.4% by 2020. The weighting is currently 0.71%.

FTSE Russell is also set to phase in A-shares to its indices from next year.

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