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China set to attract billions of dollars as MSCI adds more mainland shares to key indices

posted onMarch 1, 2019
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The world's second-biggest economy is likely to see billions of dollars into its stock market after index provider MSCI confirmed it will increase the weight of China A shares -yuan-denominated stocks traded on the mainland- in its global stock indexing system. 

“This decision follows an extensive global consultation with a large number of international institutional investors, including asset owners, asset managers, broker/dealers and other market participants worldwide” the New-York-based financial data company said in a statement on Thursday (Feb.28).

The inclusion will take place in three steps. 

Step 1: MSCI will increase the index inclusion factor of all China A Large Cap shares in the MSCI Indexes from 5% to 10% and add ChiNext Large Cap shares with a 10% inclusion factor coinciding with the May 2019 Semi Annual Index Review. 

Step 2: MSCI will increase the inclusion factor of all China A Large Cap shares in the MSCI Indexes from 10% to 15% coinciding with the August 2019 Quarterly Index Review.

Step 3: MSCI will increase the inclusion factor of all China A Large Cap shares in the MSCI Indexes from 15% to 20% and add China A Mid Cap shares, including eligible ChiNext shares, with a 20% inclusion factor to the MSCI Indexes coinciding with the November 2019 Semi-Annual Index Review. 

On completion of this three-step implementation, the MSCI Emerging Market index’s pro-forma weighting to Chinese A-shares will jump from 0.7% to 3.3%.

(Graph Source: MSCI)

MSCI China A-shares

Investors and analysts welcomed MSCI’s decision. 

“Inclusion should boost investor sentiment and, over the long term, flows into China,” Caroline Yu Maurer, head of Greater China equities at BNP Paribas Asset Management, said in a note.

“When we get to 20 percent at the end of this year, would it be 50 percent, 80 percent in one or two years’ time?” Philip Li, senior fund manager at investment firm Value Partners in Hong Kong said to CNBC. “And I think that’s where people are thinking ‘Okay, I have to have this exposure,’” he added.

Robert Horrocks, chief investment officer at Matthews Asia told Morning Star that China’s A-shares "look like a good place to be looking for long-term returns”.

Gao Ting, head of China strategy at UBS Securities, said in a note that the MSCI changes would likely spur $67 billion in fresh foreign inflows to the A-share market this year alone. Even larger inflows should follow next year. 

The Financial Times reported that up to $125 billion of offshore money could flow into domestic Chinese stocks because of the reweighting. 

MSCI started to partially include China large-cap A shares in the MSCI Emerging Markets Index in 2018.

Investors can access them through an arrangement between the Hong Kong and mainland Chinese markets. In the year-to-date there has already been 121 billion yuan of inflows through the Shanghai-Hong Kong Stock Connect. 

MSCI’s milestone China inclusion in 2018 was a positive experience for foreign investors, and “has fostered their appetite to increase further their exposure to the mainland China equity market,” MSCI Managing Director Remy Briand told Reuters. 

Foreign investors held 1.15 trillion Chinese yuan in A-shares as at the end of 2018, according to 
data from the People’s Bank of China.

Mainland China markets advanced on the first trading day of March following MSCI's announcement. China's Shanghai Composite Index rose 1.80 percent to 2,994.00 while Shenzhen's Composite climbed 1.20% to 1,564.84. Shenzen's Component advanced 1.50% to 9,167.65. Meanwhile, Hong Kong's Hang Seng Index moved up 0.6 percent at 28,812.17.

Chinese shares, which slumped sharply in 2018, jumped about 20 percent so far this year, partly on optimism that Beijing and Washington will soon reach an agreement resolving their months-long trade dispute and expectations for the expanded MSCI inclusion.

A further boost to the A-shares market will come when rival index publisher FTSE Russell 
starts to add them in its indices from June 2019. S&P Dow Jones Indices will also begin to include yuan-denominated Chinese shares to its global benchmarks this year.

MSCI also said that a future weight increase of China A shares in its influential indexes beyond 20% “would require Chinese authorities to address a number of remaining market accessibility questions” which it said include “restrictions on access to hedging and derivatives instruments as well as concerns regarding the short settlement cycle of China A shares, the trading holidays of Stock Connect and the availability of an Omnibus trading mechanism.”
 

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