Update | China’s capital outflows may increase after MSCI decision

Beijing didn’t just lose face but it also faces more capital outflows after global share index compiler MSCI declined to include mainland A shares in its emerging market indices.

The rejection, the third time in three years, had the effect of calling off multibillion dollars worth of stock buying orders in A shares listed in Shanghai and Shenzhen.

The MSCI emerging market indices are tracked by US$1.7 trillion in assets managed by the world’s largest pension funds, insurers and institutional investors. The inclusion of A-shares in the index would mean these big stock buyers would all need to add Shanghai or Shenzhen A shares to their portfolios.

HSBC estimated that at least US$30 billion would have flowed into China in the event of a favourable MSCI decision, while some analysts put the amount as high as US$400 billion in the long run. Now these potential inflows have dried up.

Big capital inflows are very much what China needs at a time when the Shanghai Composite Index is down 45 per cent from a year ago. The country’s capital outflow last year was estimated to reach US$1 trillion amid slower economic growth, slumping stocks and a weaker yuan.

Capital outflows and the share market may get worse after the MSCI decision, according to analysts.