Chinese stocks climb after being given the nod to join MSCI’s global benchmark indexes
New York-based index compiler will include 222 big-cap Chinese companies into its MSCI Emerging Markets Index and MSCI ACWI Index starting June next year
Mainland shares accelerated advances in the afternoon session on Wednesday after MSCI said it will add Chinese stocks to its global benchmarks for the first time – a move that should help the capital market of the world’s second-largest economy edge towards becoming more globally integrated.
“MSCI’s China inclusion is a necessary step in response to the needs of global investors. It also manifests global investors’ optimism in our country’s steady economic growth as well as their confidence in the stability of our financial market,” said Zhang Xiaojun, a spokesman for the China Securities Regulatory Commission.
MSCI said it plans to add 222 large-cap domestically traded, yuan-denominated stocks, or so called A-share, which will represent a weighting of 0.73 per cent in the MSCI Emerging Markets Index. That would be more than previous expectations for inclusion of 169 stocks with a weighting of 0.5 per cent.
Companies that will be added to MSCI’s benchmarks advanced in mainland trading, fuelling a rally in China’s indexes. The CSI 300 Index surged 1.2 per cent, or 41.47 points, to close at 3,587.96. The Shanghai Composite Index gained 0.5 per cent, or 16.20 points, to 3,156.21. Hong Kong shares fell for a second day.
China Ping An Insurance rose 2.8 per cent to 49.43 yuan and SAIC Motor climbed 3.2 per cent to 29.97 yuan. Home appliance maker Midea Group surged 4.7 per cent to 42.79 yuan in Shenzhen.
“MSCI included more Chinese consumers and traditional stocks into the index rather than technology companies because they recognised what investors wanted based on their consultations,” Ajay Dayal, managing director product specialist group at Legg Mason Global Asset Management said. “Overseas investors want to access China’s consumer growth story.”
MSCI made its decision after Chinese regulators made it easier for foreign investors to access mainland equities through the two Stock Connect trading links between Hong Kong and Shanghai/Shenzhen, and restricted the number of trading suspensions by listed companies. MSCI had rejected the inclusion of China shares over the past three years, citing concerns including capital controls and listed company abuses of trading halt rules.
The weighting could increase further over time if China implements more market reforms, and a full inclusion of mainland stocks into the index could take place between five and 10 years, according to analysts. A full inclusion would attract more than US$400 billion of funds from asset managers, pension funds and insurers into the mainland markets over the next decade, analysts said.
But the initial weighting is tiny and will not be implemented until next year. This means fund inflows are unlikely to result in a significant shift in the underlying sectors for now, Dayal said.
Brokerages including Sinolink Securities estimate that the initial capital inflow from global investors who track MSCI’s benchmarks for their portfolios would be as much as US$15 billion. UBS Group estimated the initial fund inflow into mainland equities at US$14 billion, while Haitong Securities said it was US$9 billion. That is even less than the single-day trading value of the Shanghai market alone.
To accommodate for China A share inclusion, the weighting of H shares may be reduced to avoid double counting of dual-listed Chinese companies while other market index weightings may reduce proportionately, Dayal said.
The Emerging Markets Index previously excluded mainland-traded stocks due to concerns about restrictions on purchases by overseas investors and concerns over abuses of the trading suspension rules. The gauge currently only includes shares of Chinese companies listed in Hong Kong or the US.
“Given the percentage of inclusion I don’t feel there will be a material impact apart from some positive ongoing sentiment effects on the large cap stocks given their valuations,” said Andrew Mattock, a portfolio manager at Matthews Asia.
But even for large cap stocks, Allianz Global Investors said it expected some profit taking in the short term because many of them have already performed well in recent months.
In Hong Kong, the Hang Seng Index slipped 0.6 per cent, or 148.46 points, to 25,694.58 and the Hang Seng China Enterprises Index fell 0.7 per cent to 10,393.59. Energy companies including CNOOC and PetroChina dropped 0.7 per cent and 1.2 per cent to HK$8.56 and HK$4.86 respectively as crude oil tumbled 2.2 per cent overnight.
With additional reporting by Joshe Ye