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Chinese stocks have finally been granted entry into the exclusive MSCI global benchmark equities index, the first step in a process that could see hundreds of billions of dollars of new capital flow into the country's share market from overseas.
Key points:
- Global index-linked investors with $US1.6 trillion funds under management will now be mandated to invest directly in Chinese A shares
- Initially around $US20bn is expected to flow in by August next year, but that may grow to to $US500bn in coming years.
- Transparency and corporate governance issue likely to delay full MSCI inclusion for several years
MSCI — the giant New York-based stock index provider — has ruled that China's market has made enough progress on governance standards to be allowed a limited inclusion in its flagship emerging markets index.
While it is a small step, global broking houses suggest full inclusion could see up to $US500 billion ($660 billion) worth of foreign capital flow into Chinese equities in coming years.
Initially 222 companies — representing less than 1 per cent of the key Chinese listings — will be included in the index that is tracked by investment funds with estimated $US1.6 trillion funds under management.
From next year, those funds will be obliged to buy the Chinese shares on the index.
Previously, foreign investment in mainland shares — known as A shares - has been dominated by stock-pickers operating on a piecemeal basis.
Other China-related investments — in companies such as Alibaba and Tencent — have been made through Hong Kong listings.
China at second-largest share market without global index support
It marks the end of the first stage of a four-year battle by Chinese authorities to gain access to the funds of the biggest global investors who have long been wary of — and prevented from — parking money in A shares.
The MSCI inclusion process suffered a severe set back in 2015, when a collapse of confidence sent Chinese shares plummeting and led to numerous suspensions of entire trading days, as well as many stocks.
Concerns about foreign investment restrictions has also delayed MSCI membership.
Despite being snubbed for years, China is the world's second-largest share market, with a capitalisation of around $US7.5 trillion — behind only the US with a value of $US32 trillion and ahead of Japan's $US5 trillion.
On Bank of America Merrill Lynch figures, the initial inclusion may initially bring around $US3 billion passive fund inflows and $US18 billion active inflows into the A-share market ahead of the index rebalancing in August next year.
"International investors have embraced the positive changes in the accessibility of the China A-shares market over the last few years and now all conditions are set for MSCI to proceed with the first step of the inclusion," MSCI Managing Director Remy Briand said.
"MSCI is very hopeful that the momentum of positive change witnessed in China over the past years will continue to accelerate."
The initial inclusions will be dominated by giant state-supported banks, utilities and industrial enterprises.
Start of a long journey to an open exchange
UBS China equity strategist Ting Gao said the A-shares were "part of their way in a global journey" towards full inclusion and an inflow of $US300 billion in new capital.
"Over the past two years, the A share market's progress towards globally accepted rules and regulations has helped ease foreign investors' concerns," Mr Gao said.
That includes new trading rules cutting the number of shares placed in long-term trading suspension.
MSCI made it clear further additions to its index depended on China becoming more transparent and aligned with global trading rules.
In other words, making further progress in eliminating the habit of intervening in the market to supress speculation and slapping on trading suspensions to arrest market falls.
However it may take some time for China to reap the full reward of full inclusion in global indices.
"Experience from Korea and Taiwan suggests it takes decades for emerging markets to go global, roughly 6-to-10 years to move from small initial inclusion to full inclusion," Mr Gao said.
Topics: globalisation---economy, world-politics, stockmarket, china
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