China’s stocks rally ing de spite eco nomy
China’s stocks have ral lied big this year, but they could go even higher if MSCI Inc. de cides next week to include main land stocks in its global indexes.
Analysts say in clud ing Chi nese A- Shares — those list ed on do mestic stock ex chan ges such as Shanghai’s — would force many money man agers to re- evaluate their portfolios and like ly in crease ex pos ure to China. MSCI is ex pected to make a de ci sion at its an nual meet ing on June 9.
China’s stock markets are alread y the world’s best per formers this year. The Shang hai Stock Exchange Com pos ite Index is up 49 per cent, while the smaller market in Shen zhen has surged a stagger ing 107 per cent.
So far, MSCI is being non- committal about its decision.
“We will stay as flex ible as possible,” said Chin Ping Chia, the Asia Pacific head of re search of MSCI, on Mon day.
But China’s stock ral ly has raised ques tions about wheth er an equity bub ble is de veloping.
Much of the rally has been fuelled by do mes tic investors, who have piled into the market after be ing em bold ened by num er ous media re ports about the bene fits of investing.
The rally is happen ing de spite steadily cooling eco nom ic growth in China over the past year. The econ omy ex panded at a seem ingly im pres sive sev en per cent in the first quar ter, but that fig ure was a six- year low for the coun try.
China’s hous ing mar ket has also sput tered, with al most every month this year see ing de clines in both home sales and prices. And Pur chas ing Managers Index readings for May showed that manufac tur ers shed jobs after ex port de mand shrank again.
But ana lysts say that while the ral ly rais es con cerns of froth, an ap prov al from MSCI to in clude A- Shares could keep stocks ris ing as new for eign in flows prop up the market.
“The Chi nese bull mar ket is intact,” said Nader Naeimi, fund man ager at AMP Capital Investors Ltd.
“The pace of gains has been dramat ic so a re duced pace of up ward acceleration would be feasible now.”
China has worked to in crease for eign cap ital in the coun try, with au thor ities boosting in vestment quotas for for eign in vest ors by more than 50 per cent this year. It also opened a link be tween the Hong Kong and Shang hai stock mar kets last year, which is current ly the only way for eign ers can ac cess main land stocks.
Even with those chan ges, China is still sig nifi cant ly under- represented in in dex es such as the MSCI Emer ging Market Index, which the world’s most popu lar emerging mar ket ex change- traded fund tracks. Cur rent ly, Chi nese shares make up about 25 per cent of the index, but it should be clos er to 50 per cent based on the total market caps of coun tries in the index.
At the mo ment, fund man agers say there is only a small chance that MSCI will de cide to in clude A- Shares, opting in stead to prep mar kets for an in clu sion announce ment at a later date.
But with a slim chance it could make a sur prise an nounce ment, an other ral ly could be in the works for Chi nese stocks.
FTSE Rus sell, a rival index provid er, has al read y opted to cre ate index es with A- Shares, potentially in creas ing the pres sure for MSCI to fol low.