26 October 2016
Global investors will pump fresh money into Chinese equities if MSCI announces the inclusion of A-shares into its emerging markets index. Photo: Bloomberg
Global investors will pump fresh money into Chinese equities if MSCI announces the inclusion of A-shares into its emerging markets index. Photo: Bloomberg

Why global investors will take a fresh look at China stocks

MSCI Inc will announce on June 9 a long-awaited decision on whether it will include China’s A-shares into the firm’s Emerging Markets Index.

The proposal has been studied for some time but there have been no clear signals so far. That said, there is a feeling in the market that the launch of the Shanghai-Hong Kong Stock Connect program has improved the chance of inclusion.

Things have changed rapidly this year. Now the question is no longer whether the A-shares would be included in the index, but rather “when”.

This comes as various parties on the mainland are very keen for their shares to join the MSCI Emerging Markets Index.

The central government is eager to lure foreign investors into the mainland market. The China Securities Regulatory Commission (CSRC), meanwhile, met up with around 30 large global institutional investors in the US to make the case for MSCI inclusion earlier, in a sign that high-level Chinese officials are keen on the inclusion.

And the CSRC has also pledged to improve the existing QFII scheme, optimize the Shanghai-Hong Kong Stock Connect program and launch a new Shenzhen-Hong Kong bourse link.

The moves are aimed at facilitating capital movement for foreign institutional investors and tackling technical issues that are seen coming in the way of A-share inclusion in global benchmark indices.

The likely inclusion is set to give a further boost to A-shares. Many foreign funds will allocate more capital for mainland stocks, leading to surge in inflows into China.

Inclusion of A-shares into the MSCI index will mean that global investors are acknowledging the reforms taking place in China’s capital markets. 

Chinese authorities have indeed done tremendous work on various issues, including IPO registration system, stock link improvement and quota expansion for foreign investors. Tax treatment, however, remains a pending issue.

MSCI index is a widely-used index for global money managers. More than 90 percent of global institutional asset managers use the index in North America and Asia. There are 5,719 funds tracking MSCI index, with total assets of US$3.7 trillion.

Given this situation, inclusion of A-shares will lead to substantial capital flow into Chinese stocks.

According to some analysts, the capital inflow effect will remain pronounced even if the A-shares inclusion takes place in 2016. By mid-2017, Chinese equities will account for 30 percent of MSCI Emerging Markets Index plus existing Chinese stocks in the US market. That would bring additional US$30 billion capital for Chinese equities, and US$17 billion capital inflow for A-shares.

The most conservative case would bring in over US$1 billion for A-shares. Capital flows could get a further boost as Dow Jones & Co. is also said to be mulling an inclusion of A-shares in some indexes.

In fact, many global institutional investors are seeking to adjust their portfolios, with some shifting from zero allocation to balanced allocation for Chinese stocks.

There is half chance for inclusion of A-shares this June, but the inclusion may actually take place next year. This is prompting global investors to take a fresh look at A-shares.

This article appeared in the Hong Kong Economic Journal on May 18.

Translation by Julie Zhu

[Chinese version 中文版]

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Senior investment banker

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