Nation’s stocks to gain more influence

Global index compiler MSCI Inc has announced that it will increase the weighting of China’s A shares in its benchmarks this year. The move is seen as the latest progress in the country’s accelerated capital market opening-up.

MSCI said it will increase the inclusion factor of A shares and add new A-share constituents in its indexes in three steps this year, a statement on its website said late on Thursday. It will raise A shares’ weighting in the MSCI Emerging Markets Index to 3.3 percent from 0.7 percent by November.

“MSCI’s decision marks a new step in China’s capital market opening-up, showing that efforts to improve market accessibility have been recognized by global investors,” said Zhang Yu, chief macroeconomic analyst with Hua Chuang Securities, based in Guiyang, Guizhou province.

“By November, the weighted increase may usher in $68.6 billion of fresh foreign capital into the A-share market, as MSCI indexes are used in the investment of trillions of US dollars,” Zhang said.

Specifically, MSCI said it will increase the inclusion factor of 239 large-cap A shares to 20 percent from the current 5 percent in three phases, with May, August and November each poised to see a 5 percentage point increase.

The inclusion factor refers to how much of a stock’s free-float market capitalization, adjusted by the MSCI, is included in its indexes.

Also, 12 large-cap A shares on the ChiNext, China’s Nasdaq-style board of growth enterprises, will be included with a 10 percent inclusion factor in May. In November, MSCI indexes will add mid-cap A shares, including eligible ChiNext shares and totaling 421 companies, with a 20 percent inclusion factor.

In 2018, MSCI became the first global index provider to incorporate the A shares in its global indexes by adding large-cap A shares into its indexes with a 5 percent inclusion factor. It then consulted with international institutional investors on A shares’ weighting from September.

Behind the announcement of the weighting increase is global investors’ growing appetite for Chinese stocks and improved market accessibility, evidenced by the sharp drop in trading suspensions in recent months, according to MSCI.

“The A-share market’s low valuation and high growth prospects constitute a major attractive factor for global investors, leading to signs of a continuous foreign capital influx in the future,” said Bao Ting, a strategist with Great Wall Securities, based in Shenzhen, Guangdong province. “As foreign investors up their presence, the market will probably see a reduction in volatility and higher efficiency in asset pricing,”

Bao said. According to Bao’s estimates, foreign capital held 1.15 trillion yuan ($171.5 billion) of A-share assets by the end of 2018, accounting for 3.27 percent of the free-float market capitalization.

MSCI’s decision on weighting increases was welcomed by the top securities regulator. “We will continue to welcome overseas long-term funds by further improving fundamental market rules, cross-border trading mechanisms and market supervision,” Chang Depeng, spokesman of the China Securities Regulatory Commission, said at a news conference on Friday. “To meet international investors’ needs, we will further push forward the opening-up of the stock market and derivatives markets,” Chang said.

On Jan 31, the regulatory commission said it planned to combine two inbound investment mechanisms — the Qualified Foreign Institutional Investors program, known as QFII, and the RMB Qualified Foreign Institutional Investors program, known as RQFII. It also said it would broaden their investment scope to include derivatives, bond repurchases and private funds.

“China is opening up faster than most people believe or think,” Henry Fernandez, MSCI’s chief executive officer, said on Thursday. “We do not see any regression on that. If anything, we see a speeding up.”