The reweighting of major global investment indices, which is underway, is expected to result in a reallocation of capital throughout emerging markets. Major stock and bond index providers have started, or have announced that they intend, to increase the weighting of China’s securities in their respective benchmark indices over the course of 2019–20. While this shift would be a welcome development for Chinese enterprises seeking financing and global investors searching for emerging opportunities, it potentially represents bad news for other emerging markets. Possible outcomes are increased volatility in their asset prices and increased pressure on their exchange rates. However, mitigating measures and circumstances can, to a large extent, offset the changes. This is because the index providers plan to phase in the proposed changes over a reasonable period of time to ensure more orderly realignments in investor portfolios, while continuing growth in global investment funds, if the global macro-financial environment remains conducive, would translate to capital inflows that compensate for the index-induced reallocation out of these countries.

Note: The analytical note is amended on July 10 for clarity. An opinion piece entitled “Re-weighting of indexes to affect capital flows” is published on China Daily on July 18.

Author: Wei Sun