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MSCI

China’s MSCI debut gets off to a dismal start as 60pc of the included stocks decline

PUBLISHED : Friday, 01 June, 2018, 1:20pm
UPDATED : Friday, 01 June, 2018, 11:25pm

More than 60 per cent of Chinese stocks included in MSCI’s Emerging Markets Index, the world’s most closely tracked equity benchmark followed by US$1.9 trillion of global funds, fell on their trading debut as investors resorted to profit-taking after recent gains.

About 140 of the 226 stocks – including movie studio Perfect World Pictures and solar energy generator Longi Green Energy Technology – closed lower when they traded for the first time amid a declining market weighed down by concerns of a heightening tumult in global trade.

Perfect World plunged by its daily maximum 10 per cent to 32.47 yuan, Guangzhou Baiyunshan Pharmaceutical sank 8.1 per cent to 40.64 yuan, and Longi slid 7.3 per cent to 22.35 yuan.

The Shanghai Composite Index, the broadest measure of stocks traded on China’s financial hub, dropped 0.7 per cent to close at 3,075.14. Turnover for Shanghai and Shenzhen markets shrank to 375.5 billion yuan (US$58.5 billion), down 8 per cent from Thursday.

Foreign inflows to mainland China via the stock connect scheme also decreased sharply to 2.3 billion yuan, only 35 per cent of Thursday’s amount.

The MSCI Emerging Markets Index rose 0.6 per cent to 1,126.83 by Friday afternoon.

The MSCI, closely used by passive investors as a benchmark for measuring their funds’ performance, will include China’s class A shares in a two-step process, making up 0.4 per cent of the EM Index’s weighting in June, and 0.8 per cent in September.

The number of A shares was initially 234, but MSCI tweaked the inclusion list several times in the past few days, finally settling down on 226.

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“Because China is really driving global growth, the inclusion of A shares in the MSCI China Index is long overdue,” said Justin Leverenz, director of emerging market equities and portfolio manager at Oppenheimer Developing Markets Fund. “In China, the A-share market is US$8 trillion to US$9 trillion of market capitalisation, and there is nothing larger in the rest of the world with the exception of United States equities. While China has a smaller economy than the US, it is driving 35 per cent to 40 per cent of growth in the world.”

The inclusion is likely to initially attract at least US$17 billion into China’s stocks, according to MSCI’s estimates. A separate forecast by Credit Suisse put it at US$22 billion.

“This is a historic moment in the opening of China’s capital markets to global investors,” said HSBC’s Greater China chief executive Helen Wong. “We see foreign ownership of Chinese stocks increasing to better reflect the scale of China’s economy and markets. These inflows can help finance China’s real economy as it becomes increasingly driven by technology, services and consumption.”

Global investors had piled into Chinese stocks in the weeks leading up to their formal inclusion.

A record 54.4 billion yuan of net capital flowed into mainland China in May via the stock connect programme that allows global investors to gain access to China’s A shares, according to data by the Hong Kong stock exchange. A day before the Chinese stocks made their MSCI debut, the stock connect recorded a net fund inflow of 6.63 billion yuan, the highest in more than a month.

“The MSCI EM Index’s inclusion of A shares will help expand the stock connect” programme, said former People’s Bank of China governor Zhou Xiaochuan, during a forum in Hong Kong about the city’s financial future.

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He said Hong Kong, as an international financial hub, has a unique role in supporting China’s opening up and reform of its financial markets.

Nonetheless, some analysts are concerned investors may have overlooked risks in the Chinese market.

Brock Silvers, managing director for Shanghai-based Kaiyuan Capital, said many Chinese companies still operate according to corporate governance that would be not be accepted in the West.

“Unsuspecting” index investors may be importing those lower standards into their portfolios, he said.

Political risks are another challenge.

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“We don’t know the details of any [financial] crimes that may have been committed by Wu Xiaohui [former Anbang chairman] or Ye Jianming [former chairman of CEFC China Energy], but their companies were quickly expropriated. Beijing may have acted in the best interests of the State and investors, but the index is now substantially subject to unregulated [and often wholly obscured] political authority, ” he added.

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