China A-shares not eligible for Scientific Beta’s indices

Smart beta index provider, Scientific Beta has confirmed that China’s A-shares are not eligible for its indices, even though the Chinese authorities have made some progress on important aspects, as there are still a number of accessibility issues which pose potential liquidity risks.

According to the company, some decisions of Chinese authorities remained unfavourable for foreign investors and could create the situations in which investors would be penalised.

These decisions were:

  • Chinese authorities could lock up foreign investors’ money in the case of extreme moves;
  • Limited domestic availability of derivative instruments, in particular index futures, access to which was restricted to approved foreign institutional investors and remained limited in scope; and
  • Foreign-ownership restrictions on China A-shares, set at 30 per cent, could become critical with future inflows.
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At the same time, the index provider said that the Chinese authorities made some progress with regards to tightening the rules around of reduction of the number of suspensions.

Also, in January 2019, the QFII quota doubled to US$300 billion to meet investment demand from overseas investors and prepare for the partial inclusion of China A-shares in some equity benchmarks.

“The definition and construction of an investable universe are key steps in the construction of every equity portfolio and in equity indexing,” Scientific Beta said in a press release.

“Investing in smart beta indices requires investors to have access to solutions where liquidity risk is thoroughly considered, because ultimately the weights of the stocks will not be equivalent to their cap-weighting but will depend on other weighting criteria.”

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