China’s MSCI Index Inclusion ‘Extremely Significant’

Shanny Basar

Jan Dehn, head of research at emerging markets specialist Ashmore Investment Management, said China’s inclusion in the MSCI benchmark emerging market index is an inexorable step towards China’s entry into and eventual dominance of the global financial system.

Yesterday index provider MSCI said it would include the first set of China mainland companies in its MSCI Emerging Market benchmark from next year. Most overseas investors cannot buy China A-shares, which trade on the Shanghai and Shenzhen Stock Exchanges, and are about two-thirds of the market capitalization of the Chinese market.

Dehn said: “All but the most myopic and deluded investors should recognise that the significance of China’s inclusion in the MSCI EM stock market index extends far beyond mere symbolism: this is an extremely significant event.”

Index inclusion fits into China’s rotation of growth away from exports and raw capital accumulation to model based on consumption and technical progress because higher domestic demand implies future current account deficits in China, which in turn have to be financed via an opening of the capital account. “Index inclusion is likely to guarantee capital inflows given the index hugging nature of most global capital,” he added.

Dehn continued that investors should now assign a larger probability to China’s large bond market being included in the main global and emerging markets fixed income indices which should ensure that hundreds of billions of dollars flow into the Chinese capital market over the next few years.

The full note can be read here.

Edith Southammakosane, Multi-Asset Strategist at ETF Securities said the accepted proposal reduced the number of stocks for inclusion to 169 from 448 so  only the most liquid large cap companies were selected.

“While full inclusion is still on the roadmap and while the Stock Connect system has increased confidence among foreign investors, China still has a long way to go as strict controls of the domestic capital markets are unlikely to be removed anytime soon,” she added.

The full note can be read here.

John Lin, portfolio manager for China equities at Alliance Bernstein, said the inclusion was a watershed for equity investors as China A-shares are the world’s second-largest stock market with a market capitalization of $7.5 trillion

“While it’s true that the shares chosen for initial inclusion are only a very small part of the larger EM Index, we expect the percentage of A-shares included in the index to significantly grow over time,” added Lin. “So by ignoring A-shares today, you would be missing compelling investment opportunities and unique China themes. Examples include leading Chinese consumer brands, world class industrial leaders and innovators that are poised to benefit from changing environmental policies.”

Lin continued that investors should start thinking about the emerging markets equity universe in two parts: All China and EM ex China. “We believe that the market will evolve along these lines in the wake of the MSCI decision. Dividing the EM universe like this offers the best way to capture the opportunities and themes in Chinese equities and allows investors to maintain exposure to a diversified basket of EM countries,” he said.

The full post is here.

Ratings agency Moody’s Investors Service said the MSCI inclusion is positive for inflows into Chinese equity markets, and passive funds and managers involved in cross-border products. Moody’s added that the partial inclusion of A-shares will start with an approximately 0.73% weighting, which translates to about $11bn of near-term fund inflows into China’s onshore markets from funds benchmarked to that index.

“The ongoing regulatory liberalization in China’s onshore market will lead to a full index inclusion of A-shares in the next few years, with an estimated 20% weight within the MSCI EM Index,” added the ratings agency. “Full inclusion is key for China to attract fund inflows, which would benefit certain asset managers, spur renminbi internationalization, and bolster investor confidence.”

Read the full note here.

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