The long-awaited inclusion of China’s A-shares into the MSCI emerging market index has finally become a reality. On June 20, MSCI announced that it will add a selection of 222 large-cap Chinese stocks to its emerging market index effective June 2018.
The decision to include the A-shares in the index came as MSCI believes that China has made enough progress in opening up its markets.
The addition in the benchmark index is expected to result in US$17-18 billion of global capital flowing into Chinese stocks in the initial stage.
MSCI’s decision has reversed the sluggish market sentiment in China. Market turnover of Shanghai and Shenzhen hit 478.1 billion yuan last Thursday, up 80 billion yuan from the previous day.
While market attention is more on the amount of funds that may flow into Chinese A-shares, the inclusion has more important implications.
For starters, the MSCI decision will encourage Chinese authorities to carry out more market reforms.
Fang Xinghai, deputy chairman of the China Securities Regulatory Commission (CSRC), has revealed that there were actually 230 stocks planned to be included in the first phase, but eight were taken out because of suspensions.
Since frequent suspensions could jeopardize a stock’s MSCI status, listed firms will be forced to be more careful and exercise more restraint in applying for trading suspension.
To facilitate access to A-shares and pave the way for inclusion into MSCI, China has expanded QFII quota, and rolled out Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect programs.
Fang said that authorities will gradually remove the daily quota imposed on stock link schemes.
The inclusion will further liberalize China’s capital market and put pressure on both regulators and corporates. The CSRC pledged to further improve market supervision and attract more international companies into A-shares in the future.
In addition, it would also help stabilize the Chinese yuan. Foreign capital inflow into A-shares will make the stock market more attractive, and convince more investors to keep their money in China rather than taking it overseas.
Excessive market manipulation by foreign investors has been China’s key concerns in opening up its market.
Authorities have insisted that the launch of derivatives should not harm financial stability.
Now, it remains to be seen if the derivatives-related rules will be relaxed in the future.
This article appeared in the Hong Kong Economic Journal on June 23
Translation by Julie Zhu
[Chinese version 中文版]
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