China stock market

Global index compiler MSCI considers quadrupling Chinese stocks’ weightings in its benchmark gauges

Implementation will be carried out in two phases, with the weighting increasing by 7.5pc each during the May and August review process next year

PUBLISHED : Wednesday, 26 September, 2018, 2:46pm
UPDATED : Wednesday, 26 September, 2018, 11:01pm

MSCI is considering raising the weighting of Chinese stocks in its benchmark indexes four fold and adding small-cap companies for the first time.

The US-based index compiler will immediately start a consultation with global investors, and the inclusion factor of yuan-traded A shares may increase to 20 per cent from 5 per cent, MSCI said in a statement on Wednesday.

Implementation will be carried out in two phases, with the weighting increasing by 7.5 per cent each during the May and August review process next year. The final result of the consultation will be announced by the end of February.

“Investors had a very positive experience after a very successful initial China inclusion this year,” said Chin Ping Chia, head of research for Asia-Pacific at MSCI. “We feel that the stock connect channel is able to take on a much larger weight than what it does today. There are discussion points that we will be consulting investors. We listed possible accessibility alignments that are needed for China to continue to increasing weight.”

Foreign demand for China’s A shares to rise following second phase of inclusion in MSCI index, say analysts

The proposal came just a day before FTSE Russell, MSCI’s main rival, is set to announce its decision on Thursday on adding China’s A shares to its global gauges that are tracked by US$1.7 trillion of global funds.

Local brokerage Shenwan Hongyuan Group expects inflows of as much as 100 billion yuan (US$14.6 billion) if Chinese stocks make up an initial 0.8 per cent weighting of FTSE’s indexes.

“The timing is interesting and it looks like that the two global index compilers are competing to gain more market shares in China,” said Wu Kan, a fund manager at Soochow Securities in Shanghai. “Both moves will help to boost confidence among investors by luring more foreign funds. Valuations of the stocks are already low now so we have double catalysts.”

MSCI also said in the statement it will probably add the stocks on the ChiNext gauge of start-ups on the Shenzhen exchange starting May next year and mid-cap companies in 2020.

What is the MSCI index, and why does it matter so much to China?

China’s weight in MSCI’s emerging market and China indexes will increase to 2.8 per cent from 0.71 per cent if the inclusion factor of large caps is increased to 20 per cent. China’s weight will further go up to 3.36 per cent after mid-cap companies are included.

MSCI announced in June the inclusion of 236 Chinese big-caps in its benchmarks for the first time, with the stocks accounting for 0.8 per cent weighting in the gauges including the MSCI Emerging Markets Index.

Overseas investors have been buying Chinese stocks actively since then, but that has failed to check the losses in the mainland’s equities amid concerns about the trade war with the US and financial deleveraging. They have ploughed a combined 126.4 billion yuan into Chinese A shares since June, according to Bloomberg data.

The Shanghai Composite Index briefly slipped into a bear market earlier this year wiping out US$2 trillion in market capitalisation. It is the worst performer among the world’s major stocks benchmarks this year with a decline of 15 per cent.

The index rose 0.9 per cent to 2,806.81 on Wednesday, extending a rebound from a four-year low. It is valued at 13.2 times reported earnings, near the cheapest level in almost four years, Bloomberg data showed. The ChiNext index added 1.1 per cent for the day, paring its loss to 19 per cent this year.

“The gradually internationalising China A-share market presents a deep, broad, liquid and interesting investment opportunity to global investors and A shares’ increasing accessibility should be positive for investor sentiment,” said Alexander Treves, a strategist for emerging markets in Asia at JPMorgan Asset Management. “Although China onshore equities currently face a number of short-term headwinds, this provides an attractive entry point in companies where the long-term structural growth story remains intact. We are using market weakness as a buying opportunity to add to positions in which we have a high conviction.”