(Corrects spelling of “surprising” in paragraph 4)

* China A shares may be included in key benchmark in two
years

* Tax, capital mobility, and clearing remain key hurdles

* China A shares to have initial weighting of 5 pct in new
indexes

By Michelle Price

HONG KONG, May 26 (Reuters) – FTSE Russell, one of the
world’s largest index providers, said it will launch two
transitional indexes that include China A shares – a staggered
approach that will bring local Chinese shares into its global
emerging markets benchmark in two to three years.

Expectations that yuan-denominated shares listed on the
Shanghai and Shenzhen exchanges could make the cut have grown as
reforms such as the Hong Kong-Shanghai Stock Connect scheme have
helped open up China’s stock market.

Chinese authorities have lobbied hard for the inclusion in
global benchmark indexes which could prompt billions of dollars
to pour into China stocks over time, but some of the world’s
biggest fund managers oppose the move due to investment
constraints in the country.

“FTSE have offered a half-measure and that’s not completely
surprising, given the intransigence with which a number of major
index users have reacted to the idea of China A share inclusion
in global benchmarks,” said Michael McCormack, executive
director at Shanghai investment consultancy Z-Ben Advisors.

The FTSE announcement comes ahead of a June 9 decision on
China A share inclusion by rival MSCI Inc, owner of the
world’s most influential emerging markets benchmark against
which some $1.7 trillion of funds is tracked.

“Some investors want to move much quicker than others,” Mark
Makepeace, CEO of London Stock Exchange Group-owned FTSE
Russell, told Reuters in Hong Kong on Tuesday.

“The biggest funds want to move earlier, it’s more complex
for some others and they will want a longer period of time to
manage this change,” he said, adding that some clients had been
shocked at the idea of A share inclusion.

Concerns over tax, capital mobility, clearing and settlement
remain key barriers to inclusion and the two new indexes would
merge with the standard FTSE emerging markets index when China
shares meet the provider’s criteria, he said.

The indexes will be called FTSE Emerging inclusion indexes,
and will have an initial weighting of 5 percent for China A
shares. That will rise to 32 percent when the shares become
fully available to international investors.

When taken together with other types of China shares
including those listed in Hong Kong, Chinese shares would then
account for 50 percent of the emerging markets index, said FTSE
Russell. It has scheduled an update of its plans in September.

Wu Kan, head of equity trading at hedge fund Shanshan
Finance in Shanghai, said global money inflows could be limited
at first.

“China hasn’t fully opened its capital markets, and there’s
a shortage of derivative and shorting tools global investors can
use to hedge risks,” he added.

(Additional reporting by Sam Shen in Shanghai; Writing by
Lawrence White; Editing by Edwina Gibbs)