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

Foreign demand for yuan denominated equities is likely to increase following the second phase inclusion of Chinese A shares in the MSCI Emerging Markets Index on Friday, according to analysts.

The inclusion comes as Beijing continues with reforms to further open up its US$7 trillion stock market amid its ongoing trade war with the US.

MSCI also increased the weighting of the Chinese large caps to about 0.8 per cent of the index from 0.4 per cent, which was introduced during the first phase of their inclusion in June.

Ten companies were added to the index, bringing the total number of Chinese companies to 236. The partial inclusion factor was doubled to 5 per cent, meaning the stocks will be included based on 5 per cent of their free-float market value.

Given Friday’s relatively smooth operations, MSCI is expected to continue with the process, possibly doubling the weighting to 10 per cent in 2019. The UK indexes compiler FTSE Russell is likely to promote Chinese A shares to secondary emerging status on September 26, and said it could give them more weighting than MSCI.

“Chinese equities are under-represented in global investors’ portfolios, but will eventually become mainstream for them,” said Stephane Loiseau, head of cash equities and global execution services for Asia-Pacific at Societe Generale.