MSCI includes A- shares

Markets to open up to overseas investments: regulator

China’s securities regulator hailed a decision by US index provider MSCI to include a selection of A- shares into its Emerging Markets Index, calling it a step toward meeting the needs of international investors. Mainland stock markets responded calmly to the news on Wednesday.

MSCI said it decided to include 222 large- cap mainland stocks with a weight of approximately 0.73 percent of the index, which will take effect in June 2018. The number included is larger than the 169 recommended in this year’s proposal.

China Securities Regulatory Commission ( CSRC) spokes- person Zhang Xiaojun said on Wednesday that China “appreciates” the inclusion.

“The inclusion of A- shares in the index is a necessary step to meeting the needs of international investors. It shows that international investors are confident about China’s economic prospects and financial stability. We are glad to see it happen. The domestic capital market will be more open toward overseas investments,” Zhang said.

The MSCI said in a statement on Wednesday that the inclusion, following three earlier rejections, has “broad support” from international institutional investors with whom MSCI consulted as a result

of positive changes in mainland stock markets, including the stock connect programs and relaxation of pre- approval requirements.

Mainland stock markets responded calmly to the news. The Shanghai Composite Index gained a mere 0.52 percent, while the Shenzhen Component Index rose by 0.76 percent. The Hong Kongbased Hang Seng Index shed 0.57 percent.

Sebastien Lieblich, Global Head of Index Management Research at MSCI, told the Global Times on Wednesday that it’s “hopeful” more Chinese A shares will be included in the MSCI index in the future as long as China continues reforms and enhances the accessibility of mainland stock markets by removing the trading limit and making the stock connect mechanisms function better.

“Including A- shares is the right course of action. Given the growing significance of the Chinese economy, investors should be given the opportunity to gain greater access to mainland- listed companies,” Ken Wong, Client Portfolio Manager at Eastspring Investments, told the Global Times.

Limited influence

About $ 17- 18 billion from overseas investors is likely to flow into the A- share markets “for starters,” MSCI said at a press conference on Wednesday, but it refused to forecast the long- term prospects of overseas capital.

UBS strategist Gao Ting projected the initial inflow at around $ 14 billion. “This is not a big amount compared with the daily trading value of A shares,” he said.

A statement East Capital sent to the Global Times on Wednesday said that although the inclusion “could trigger a rally in some stocks that domestic investors perceive as foreigner- friendly stocks,” it is “not going to rock the Chinese A- share market.”

Dong Dengxin, director of Wuhan University of Science and Technology’s Finance and Securities Institute, told the Global Times that direct foreign investment remains largely shut out of the A- share markets, which limits the influence on the markets.

“Even if A shares are included in the MSCI index, overseas investors who want to buy A shares can only do so through the QFII program or stock connect programs with Hong Kong, both of which have strict quota restrictions. The amount of overseas capital to mainland markets will be very limited compared with the size of the markets,” Dong said.

But Gao stressed that the inclusion will change the attitude of overseas investors toward A shares. “Currently, overseas investors prefer bellwether Ashare stocks in sectors like healthcare, appliances and beverages, many of which are already included in the 222 stocks. But what is new to them are financial stocks, which have also been included in the Emerging Markets Index,” he told the Global Times during a conference call on Wednesday.

Understanding A shares

Gao said what’s more significant about the inclusion is that more overseas investors will get to understand A shares.

“They [ overseas investors] didn’t know much about A shares. But after being included in the MSCI index, they will see many investment opportunities in A shares,” he noted.

Wong added that the inclusion “provides some opportunities for fund managers like us to do more stock- picking within China.” He added that his company has added 800 Chinese A- share companies into their China equity investment portfolio.

Li Daxiao, chief economist at Shenzhen- based Yingda Securities, told the Global Times that the inclusion will also push reforms in the mainland stock markets, making the investment climate “more mature” and standardized.