China widens stock market access to global investors

Chinese stocks have risen strongly, following the decision by US stock index provider Modern Index Strategy Indexes, aka MSCI, to admit them to its global benchmark equity index.

The move, which has been widely welcomed, will mean that mainland equities, known as China A-shares will be added to the MSCI emerging markets (EM) index) next year. Although China’s equity and bonds market are the world’s second-largest and third-largest respectively, overseas investors’ holding in each totals less than 2%.

Among the commentaries issued in response, David Raper and Emil Wolter, portfolio managers at asset management firm Comgest, issued the following briefing:

• MSCI’s decision has the potential to change China’s status in international equity indices – it is pivotal for the future of the EM asset class, transforming its structure.

• Full inclusion of Chinese A-shares into the MSCI EM index would mean China representing 40% of this index, which currently ignores the Shenzhen and Shanghai stock exchanges.

• China is not a market for passive investors – mainland China’s equity market offers all ingredients for alpha generation; only 10% of the market cap is in the hands of professional investors compared with 80% in Europe.

• MSCI ignores mainland Chinese equities for viable yet diminishing concerns on capital mobility and high level of share suspensions, and the opening of China’s bond and equity markets must be seen in the light of Beijing’s wish to internationalise the renminbi (RMB).

• Risk to the index inclusion are real in 2017, but will abate over time

Helen Wong, chief executive officer (CEO), Greater China at HSBC called the move “a pivotal moment for global investment in China’s capital markets.”

She added: “While the initial weighting is relatively small, this is the start of a process through which Chinese equities will achieve a prominence in global investors’ portfolios that reflects the size and significance of China’s domestic stock market and its economy. It will also provide impetus for the continuing internationalisation of RMB as a global investment currency.

“The MSCI EM Index is the performance benchmark for around US$1.5 trillion of investments, so we would expect the inclusion of A shares to be a catalyst for substantial inflows into China’s market over time.

“The successful launches of the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect schemes paved the way for this index inclusion, and China’s ongoing commitment to liberalising global access to its markets will continue to create exciting opportunities for investors.”

MSCI’s decision was also praised by the Asia Securities Industry & Financial Markets Association (ASIFMA) as “an important step in further internationalising China’s markets and enhancing its investment environment.”

ASIFMA commended the China Securities Regulatory Commission (CSRC) and other Chinese authorities for “the substantive improvements they have brought about in Chinese financial markets over the past two years and MSCI for its thoughtful restructuring of its inclusion framework.

“We look forward to working with the Chinese authorities to continue to enhance the attractiveness of China’s equity markets to international investors,” it added.

61 views

Related reading

Nao the Robot