China stocks win MSCI inclusion

AFTER three rejections, China’s A shares finally won the international seal of approval which they have been craving for.

This inclusion will result in billions of fresh investments into one of the world’s largest equities markets.

Morgan Stanley Capital International (MSCI), a leading global index provider, will now include 222 Chinese stocks, called ‘A shares’, into its popular, US$1.6 trillion worth of emerging-markets stock index for the first time from June 2018 onwards.

MSCI said its decision had “broad support” from institutional investors. The change in sentiment was mostly due to fund managers’ improved access to Ashares through the Stock Connect programme, which links Hong Kong with Shanghai and Shenzhen without subjecting investors to the same capital restrictions they would face buying shares on the mainland using renminbi.

Hence, there is another alternative for foreign investors to step into China’s stock market.

According to Mattew Vaight, a manager of the M&G Global Emerging Markets fund, the 222 companies to be included, represent five per cent of the 5.5 trillion pounds of Chinese A-share market.

This move is seen as an important step in widening access to China’s stock markets and also signifies China’s increasingly important role in the global economy. The immediate impact will be small to non-existent as the implementation will not happen until next year.

However, when the shares are included, it could lead to around US$5 billion to US$15 billion of flows into A-shares from passive funds tracking the MSCI Emerging Markets Index, which will be obliged to buy the shares from these companies.

The market looks attractively valued, but it is being skewed by the banks and real estate companies that are at the centre of China’s bubble worries.

Hence, stock selection will be fundamental in ensuring the success of this market. We can predict that the mainland’s stock market will be more volatile in the coming months but the direction is still uncertain.

Full China A-shares inclusion could yet be a few years away but when this finally happens, Ashares could account for almost 20 per cent of the MSCI index.

When added to the existing offshore Chinese share weighting of 27 per cent, it will mean China could represent around 45 per cent of the benchmark.