(Reuters) - U.S. index provider MSCI said on Tuesday it would add mainland Chinese stocks to its global emerging markets benchmark index, after having declined to do so for the past three years.
MSCI plans to add 222 Chinese shares to its Emerging Markets Index, with an initial weighting of 0.73 percent.
The full inclusion of domestic Chinese stocks in the widely tracked MSCI Emerging Markets Index could pull more than $400 billion of funds from asset managers, pension funds and insurers into mainland China’s equity markets over the next decade, according to analysts.
”The launch of Stock Connect has been a pivotal part of making this happen over the last couple of years or so. The reduction in suspension of stocks has also been quite important.
Flows in the short term are actually quite modest, probably about $12-14 billion of flows from active and passive in year one after inclusion. But on a five-10 year view, there’s potential for $500 billion worth of inflows, which is huge. This is based on full-weight, full inclusion for both MSCI and FTSE.
For global equity funds, China only represents 3 percent of global equity funds right now in terms of weighting. This is versus the second-largest market cap in the world. So there’s a big lag between where equity funds are positioned globally and how big China has become. As you start to see more inflows, China gets a bigger weighting in equity funds, which actually represents really where the market is today.”
SEAN TAYLOR, ASIA PACIFIC CHIEF INVESTMENT OFFICER AT DEUTSCHE ASSET MANAGEMENT
”From today, international investors who don’t know the A-share market, and who aren’t looking at Asia from Asia, need to focus on that. Going forward, China and Asia are already a big part of the emerging market index, and will become increasingly bigger as time goes on.
We’re positive on the Chinese market but we prefer H-shares because we think there’s more chance of A-share investors buying the H-shares... But we have to note that in certain stocks, we can get exposure in the A shares to industries we can’t get in H-shares.
China has been given a big tick in the box from the international investment community and the MSCI. And it might mean that over the next few years, they will accelerate reforms. It gives them the confidence to know that they are doing the right thing.
KEN JARRETT, PRESIDENT OF THE AMERICAN CHAMBER OF COMMERCE, SHANGHAI
“The inclusion of some China A-shares into MSCI’s emerging markets index is another sign of China’s ongoing integration into the global financial system. We hope that the MSCI decision will spur domestic regulators to bring China’s stock markets in line with global norms and make the regulatory environment more predictable, improve transparency in the stock market listing process, and bring stronger rule of law to the wider securities industry. This would mean not banning major stockholders from selling shares during periods of market turbulence, not suspending the trading of stocks outside the use of predetermined circuit breakers, and therefore not creating the conditions that lead to moral hazard.”
”This has been a long awaited decision, so it’s not entirely surprising. It will definitely now put Chinese companies on the map, these companies which were seen to be largely the domain of retail investors.
From a sentiment and symbolic perspective, it’s significant. But for those active investors who wanted to participate in this part of China’s economy, they’ve already done so.
The 0.7 percent inclusion, on an absolute level, doesn’t look that big. But the fact is, when you look at the availability of companies, the size of the market, even a small shift makes a significant difference...A lot of them are in consumer and services sectors, which is what foreign investors find the most interesting part of China’s growth.
As we move ahead, as more details emerge, there will be more interest...It’s making it easier for foreign investors to understand and have access to these companies. As things develop further, and we think the regulator will be working on that, it will definitely mean expanding the universe a bit.”
KEVIN ANDERSON, ASIA PACIFIC HEAD OF INVESTMENTS, STATE STREET GLOBAL ADVISORS (via email)
”In the short term, certain market policies and arrangements may continue to weigh on some investors’ minds. For example, trading suspensions of China A-shares, which most recently peaked in 2015, can create challenges for investors. Chinese stock exchanges also require pre-approval of any financial products linked to China A-shares. MSCI has highlighted the potential for disruptions to offering existing financial products based on the MSCI EM Index if a Chinese exchange denies approval of MSCI’s licensing of that index.
Reservations remain over pre-approvals and technical issues related to Stock Connect, including the timely execution of trades and settlement, as well as a segregated accounts model that remains out of line with international standards. By and large, however, investors appear to be confident enough about the current framework.
With China continuing to pursue its reform agenda, and the domestic market now too big to ignore, China’s ultimate aim of full inclusion should be the focus. China A-shares are estimated to grow to as much as 15 percent of the EM Index market cap, yet the timeframe for that remains uncertain.”
JOHN SIN, HEAD OF ASSET SERVICING FOR GREATER CHINA, BNY MELLON (via email)
“Despite the reduced A-shares index weighting of 0.73 percent, today’s announcement represents a defining moment for the Chinese stock market. China’s inclusion to MSCI’s Emerging Market Index symbolises the continuation of China’s inevitable rise and increased relevance within global portfolios. While the short and longer term impact will have to be monitored, investors will be cognizant that China’s weighting and influence continues to increase.”
GREG KUHNERT, PORTFOLIO MANAGER AT INVESTEC ALL CHINA EQUITY FUND (via email)
“At long last MSCI has included the second largest equity market in the world in their indices, thanks to improved accessibility from the Hong Kong and Shanghai/Shenzhen Connect programmes... We believe Chinese A shares bring great benefits to global investors, namely the ability to invest in a broader universe of ideas (over 3,000 listed A shares) that are more representative of the Chinese economy and its new growth drivers, along with greater diversification benefits from an overall portfolio volatility perspective. We believe in the long term that China as a country will play an outsized role in regional and emerging portfolios and may in itself become a unique asset class for asset allocators across the world.”
Compiled by Nichola Saminather and John Ruwitch; Editing by Jacqueline Wong