Once some of those stocks are added to the key MSCI Emerging Markets Index, an MSCI executive said that about $17 billion to $18 billion should initially flow into mainland China’s stock market.
Tracked by an estimated $1.6 trillion, a long-awaited decision in favor of adding stocks, known as A shares, to the firm’s emerging markets index, was announced by MSCI earlier. And as a result, in order to match the updated version of the index, Chinese A shares must be bought by non-Chinese investors that follow the MSCI Emerging Markets Index.
Chin Ping Chia, head of research for Asia Pacific at MSCI, said on a conference call with journalists after the inclusion decision was announced, that foreign investors own less than 1.5 percent of the market due to limited access to the mainland Chinese stocks. $17 billion to $18 billion could flow into Chinese A shares, he estimated.
A weight of 0.73 percent in the emerging markets index would eventually be given to China by MSCI’s decision to add 5 percent of the floating market cap for 222 China A shares. Bank of China and Tsingtao Brewery would be included in the stocks on the list.
The MSCI decision should improve short-term sentiment for Chinese A shares, said Lucy Qiu, emerging markets strategist at UBS Wealth Management. But around $7 billion to $8 billion wil be the initial flows into China’s mainland stock market, she estimated.
In contrast to a 9 percent rise for the S&P 500 and with 18 percent gains for the iShares Emerging Markets ETF (EEM), the Shanghai composite has risen just over 1 percent so far, this year.
“We believe our clients will benefit from today’s decision to bring Chinese equities into mainstream investment. BlackRock has continued to support all opening of investment in China’s onshore capital markets for a number of years,” Ryan Stork, BlackRock chairman, Asia Pacific, said in a statement.
Even while the index only includes Hong Kong and U.S.- traded shares of Chinese companies, China already has the largest weighting in MSCI’s Emerging Markets Index at nearly 30 percent. The index giant had decided against adding the mainland traded stocks for the last three years.
Following reviews in May and August 2018, MSCI plans to add the A shares in a two-step process next year. Chia said that the trade limits under the stock connect program that links Hong Kong’s stock market with that of Shanghai and Shenzhen were partly responsible for that. MSCI representatives said that a major factor in MSCI’s decision on Tuesday was the development of the connect program.
“We are very hopeful … Chinese authorities will continue with the momentum” in opening up Chinese markets to foreigners, Sebastien Lieblich, global head of index management research at MSCI, said on the press call.
Lieblich said that mid-cap mainland Chinese stocks could also be added to the emerging markets index if China improves the ability of foreigners to access its markets. he estimated that inflows could roughly double to $30 billion to $35 billion in that case as mainland China would have a 1.4 percent weighting in the index overall.
(Adapted from CNBC)