China’s domestic equities will join MSCI Inc.’s benchmark indices after three failed attempts, a landmark step in the nation’s integration with the global financial system, Bloomberg reports.
The decision, announced by the New York-based index compiler on Tuesday, will give China’s US$6.9 trillion stock market a bigger role in everything from exchange-traded funds to 401(k) retirement plans.
It also advances President Xi Jinping’s ambitions to make the yuan a global currency, the report said.
While locally-traded Chinese shares will initially comprise just 0.7 percent of MSCI’s global emerging-markets gauge, the weighting could increase over time if the country enacts further reforms.
The inclusion will be done in two steps: the first in May 2018 and the second in August of next year.
Also Tuesday, MSCI put off decisions on whether to reclassify Argentina as an emerging market and to demote Nigeria to standalone status. It listed Saudi Arabia on its watch list for potential classification as an emerging market.
The full inclusion of domestic Chinese stocks in the widely tracked MSCI Emerging Markets Index could pull more than US$400 billion of funds from asset managers, pension funds and insurers into mainland China’s equity markets over the next decade, Reuters said, citing analysts.
“Inclusion in the MSCI index family is a strong signal of greater market openness, and it will undoubtedly help the A-share market to attract broader attention and participation of international investors,” said Yannan Chenye, head of China equities research and portfolio manager at Harvest Global Investments in Hong Kong.
“This sharp increase in international market participants will substantially change fundamental features of the market.”
The decision not to reclassify Argentina to an emerging market came as a surprise to investors. The country’s shares will remain in the smaller frontier markets index, where it has been since 2009.
“We think Argentina could be initially hit, because the expectation for the inclusion was pretty high,” said Lucy Qiu, emerging market analyst at UBS Wealth Management in New York. “We still think this could be a long-term positive story but hold tight for temporary weakness.”
MSCI’s decision to give China’s A-shares the green light represents a symbolic victory for the Chinese government, which has been working steadily over the past few years to open up its capital markets, Reuters said.
“This decision has broad support from international institutional investors with whom MSCI consulted, primarily as a result of the positive impact on the accessibility of the China A market,” MSCI said in a statement.
The company has been in discussions with Chinese regulators and global investors for nearly four years on whether to add yuan-denominated shares listed in Shanghai and Shenzhen to the benchmark.
It had left them out because of concerns over restricted access to China’s equity markets.
In March, however, MSCI moved to relax its investment criteria by cutting the number of stocks to 169 from 448 in a bid to address curbs on repatriating capital from China and concerns over the country’s high number of suspended stocks.
The revised proposal helped address these issues because the 169 stocks can be easily accessed by foreigners through the “Stock Connect” link launched in 2014 and significantly expanded in December.
MSCI said it planned to add the 222 stocks – which will have an initial weighting in the index of just 0.73 percent – and will begin a review of the A-shares and include them in provisional indices beginning in August.
“Over the long term, assuming further liberalization and regulatory reform of the mainland stock markets, the depth of China’s A-share market could mean China gains substantial weight within those broader indices,” said Nick Beecroft, portfolio specialist of Asian equity at T. Rowe Price in Hong Kong.
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