Date
19 August 2017
If MSCI rejects China’s inclusion again, that could likely provoke speculative buying by red-faced market players in China. Photo: Reuters
If MSCI rejects China’s inclusion again, that could likely provoke speculative buying by red-faced market players in China. Photo: Reuters

Be cautious ahead of MSCI decision on China A-shares

The market sentiment in China’s A-share market has been abnormally depressed in the first half of 2017. With retail investors’ pessimism over the market, they are still worrying about further yuan depreciation.

In my view, that fear ceases to matter anymore. The yuan has depreciated 2.7 percent year-to-date against the basket of currencies in the China Foreign Exchange Trade System, but it has appreciated 1.9 percent against the greenback.

Furthermore, there are rumors recently that a quota of US$10,000 per request to bring yuan overseas will be enforced starting July 1, with the foreign exchange quota of US$50,000 a year unchanged.

Market suggests that the above measure, if adopted, would add to the depreciation pressure on the yuan, which is something I disagree with.

Taking the anti-trade rhetoric of the Trump administration into account, another yuan dip against the dollar would become a catalyst for the US government to slap tariffs on imports from China. And I believe that is a needless move for China.

However, we found subtle changes in the market sentiment lately. In the end of May, Moody’s Investors Service downgraded China’s credit, and the China market responded with anger and immediate rebuttal. In defiance of Moody’s surprise move, Chinese stocks even closed higher and shrugged off the fresh credit concerns.

The rising optimism has also been fueled by the rumor that state-backed institutions would support Hong Kong stock market to create a positive atmosphere before July 1, the 20th anniversary of Hong Kong’s 1997 handover.

One of the major events of the market this week should be MSCI’s decision on the potential inclusion of mainland Chinese stocks. While it would be the fourth time for the MSCI to decide whether it will accept China’s domestic A-shares in its US$1.5-trillion Emerging Markets index, many analysts, as well as the China Securities Regulatory Commission, play down the significance of the inclusion.

Basically, I agree that the real impact of the inclusion would be minor. With a 5 percent initial inclusion factor, the eligible A-shares would represent less than 1 percent in the MSCI Emerging Markets index, which indeed does not match China’s weight in the global economy and markets.

A better way is for the MSCI to include A-shares in the MSCI China index, while removing Hong Kong stocks and Chinese stocks listed outside mainland China from the MSCI EM index.

The current MSCI EM index can be turned into an “MSCI EM ex-China index”, similar with those Asia ex-Japan indices in the markets.

More importantly, if MSCI rejects China’s inclusion again, that could likely provoke speculative buying by red-faced market players in China. In that case, we will see a sudden surge in the Hang Seng Index to show contempt to MSCI’s decision.

Since early 2016, I have expected a “slow bull” market in Hong Kong stocks with a short-term target of 26,000 for the benchmark index. If the macroeconomic picture looks better and a growth in corporate profits is recorded, I would be willing to raise the target.

This article appeared in the Hong Kong Economic Journal on June 20

Translation by Ben Ng

[Chinese version 中文版]

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Eddie Tam is the founder and CEO of Central Asset Investments.

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