MSCI adds PetroChina, ICBC and more than 230 Chinese stocks to US$1.5 trillion emerging market index

The inclusion of China’s yuan-denominated A shares will attract as much as US$400 billion of additional investments to the country’s capital markets, according to estimates

PUBLISHED : Tuesday, 15 May, 2018, 7:46am
UPDATED : Tuesday, 15 May, 2018, 11:22pm

MSCI, one of the most closely followed benchmarks in global finance, has added China’s largest oil producer and two of the biggest Chinese banks to a list of yuan-denominated A shares that international investors can own, in a move that is expected to attract a surge of inflows to the country’s US$7.5 trillion stock market.

PetroChina,the Industrial & Commercial Bank of China (ICBC) and China Construction Bank were among the 234 stocks in the final compilation of the MSCI Emerging Market Index, according to a press release.

MSCI had announced last year that it would add large-cap Chinese-listed shares into the US$1.5 trillion emerging-market index, and the US$2.8 trillion global index tracked by passive funds.

US$400 billion tipped to flow into China stocks after MSCI inclusion

After the first phase of inclusion is completed, the so-called A-shares will account for a symbolic 1.26 per cent and 0.39 per cent in the China and emerging-market indexes.

Analysts predict that the MSCI inclusion will draw as much as US$400 billion of additional investments, when taking into consideration the funds by actively managed funds over time.

The timing of the MSCI inclusion was unfortunate, seeing as the Hong Kong and Chinese stock markets had been weighed down in recent months by rising trade tensions between Donald Trump’s administration and a newly affirmed government line-up under Xi Jinping. The Shanghai Composite Index has fallen 4 per cent this year, while the large-cap CSI 300 declined 3 per cent.

Global investors tuck into China stocks as MSCI inclusion nears

Improvements to China’s domestic markets will boost their capitalisation in the MSCI through a closer alignment of China’s A-share market with international market standards, relaxation of daily trading limits, further progress on suspensions and loosening of restrictions on the creation of index-linked investment financial products.

Raymond Ma, portfolio manager at Fidelity International said he was constructive on consumer, information technology and industrials sectors as the increasing participation by institutional investors after the MSCI inclusion will shift focus toward the long-term fundamentals of companies. Currently, the A-share market is driven by retail investors who tend to “respond to short-term market noise and herding behaviour,” he said.

Bigger stock connect quotas to cater to inflows when MSCI includes China

Global investors had already been gearing up for the inclusion of A shares in the MSCI, ploughing money into Chinese equities ahead of the formal move. They bought an average 2.38 billion yuan (US$376 million) of mainland-traded shares everyday in April through the Shenzhen and Shanghai stock connect programmes with the Hong Kong exchange.

That was the highest level since the stock links were started in 2014 to give overseas investors wider access to China’s stocks.

Earlier this month, China quadrupled the daily quotas for the stock connect schemes linking mainland and Hong Kong markets to address a potential surge in capital flows after MSCI’s A-share inclusion.

Hong Kong takes steps to ensure liquidity when MSCI adds China

Under the new quota, mainland investors are able to trade up to 42 billion yuan in Hong Kong stocks, up from 10.5 billion yuan previously, while investors in Hong Kong can trade up to 52 billion yuan worth of stocks in Shanghai and Shenzhen, up from 13 billion yuan.

China’s stock market was lukewarm toward the MSCI inclusions, with the CSI 300 rising by 0.4 per cent, while the Shanghai Composite Index rose 0.6 per cent.

“The inclusion has a bigger psychological impact on the overall market than real impact, as the initial weighting is too small,” said Qiu Zhicheng, an equity analyst for ICBC International. “But investors will probably pursue relevant stocks in the first stage, especially those sectors that haven’t attracted much fund inflows previously.”

With additional reporting by Jodi Xu Klein in New York