SOURCE / MARKETS
MSCI adds China A shares to key indexes, foreign inflow breakthroughs expected
By and Published: Mar 01, 2019 07:07 AM
Global index provider MSCI announced Friday it would increase Chinese onshore A shares within its market index by raising the inclusion factor from five to 20 percent in three steps.
"Stock connect has proven to be a robust channel to access A shares. The successful implementation of the initial five-percent inclusion of China A shares has been a positive experience for international institutional investors and has fostered their appetite to increase further their exposure to the Chinese mainland equity market," said Remy Briand, MSCI Managing Director and Chairman of the MSCI Index Policy Committee, in a press release on Friday.
Large cap shares increased in three steps rather than two steps, as originally proposed, to alleviate potential pressure on implementation dates, the index provider said. Additionally, a proposal to add ChiNext on the list of eligible stock exchange segments for MSCI received wide approval.
Upon completion of the three-step implementation, there will be 253 large and 168 mid cap China A shares, including 27 from ChiNext on the basis of MSCI, representing a 3.3 percent weight growth, the press release said.
At Friday's close, the benchmark Shanghai Composite Index closed up 1.80 percent to 2,994.01, the smaller Shenzhen index ended up 1.50 percent higher and the ChiNext index, China's NASDAQ-style board, rose 2.10 percent, following the MSCI announcement.
China Securities Regulatory Commission's (CSRC) spokesperson Chang Depeng said Friday that MSCI's decision fully reflects international investors' recognition of China's reform and opening up as well as confidence in the country's healthy economic development.
MSCI's decision to increase the weighting of China A shares in its flagship emerging markets index underlines its recognition of China's efforts to open the country's capital market to overseas investors and allow them to share the growth dividends of its market, analysts said.
It has been estimated that an increase in allocation of A shares from an initial inclusion factor of five percent to 20 percent will bring an inflow of over 410 billion yuan ($61.2 billion) to the A-share market.
The past month which has seen one of the best periods of the Chinese capital market in terms of performance seems to the perfect timing for MSCI's decision to add a new tranche of Chinese stocks to its emerging markets index.
Chinese A-share markets erupted like a volcano on Monday, posting their best daily performance in seven months with the Shanghai Composite Index surging out the psychologically important 2,900-point benchmark.
Total trading volume in Shanghai and Shenzhen, a sign of investor confidence, surpassed 1 trillion yuan, the highest since November 2015. The gains prompted many observers to say that a bull run may have kicked off.
"A further A-share MSCI inclusion doesn't mean an overnight influx of foreign funds into the market, but domestic investors, inspired by a roaring rebound since February, might become motivated to jump into stock trades," Liu Dongliang, a senior analyst at China Merchants Bank Research Institute, told the Global Times.
He shrugged off worries the rebound could be a flash in the pan, explaining the recent up and down fluctuations following a spectacular rebound on Monday are indicative of a congested market.
Following three failed attempts, the mainland stocks were added to MSCI's emerging market benchmarks in June 2017 and two more tranches were included in 2018. These moves failed to pull China A-share markets out of last year's downturn amid the China-US trade tensions, although overseas investment in passive funds following MSCI indexes was supposed to take on A-share exposure.
Analysts believed that increased weighting of A shares in MSCI indexes will increase overseas investors' exposure to China's capital market and 2019 may mark a breakthrough year for foreign inflows to A-share market as the country continues to push ahead financial opening-up.
Gao Ting, head of China Strategy at UBS Securities, said at a press conference via telephone that foreign capital's role in China's A shares is becoming bigger and tend to favor the consumption sector, including home appliance, and food and beverages. "They bet on China's consumption in a long-term view," he noted.
"Compared with investment and exports, the two drivers of China's GDP growth, consumption, is more sound and steady," said Gao.
Along with the MSCI move, China has made gradual steps in recent years to open its capital markets.
In a move aimed at opening up mainland equity markets even further, the State Administration of Foreign Exchange (SAFE), the foreign exchange regulator, announced in January it would double the quota for the Qualified Foreign Institutional Investor (QFII) program to $300 billion.
In addition, the CSRC recently accepted application documents from two foreign-invested institutions for QFII qualification, the first time since April 2018, Caixin reported on Thursday.
As of Wednesday, overseas investors received quotas worth $101.45 billion, slightly higher than $101.35 billion at the end of January, show SAFE data.
A Bloomberg survey conducted among banking and investment professionals in the Hong Kong Special Administrative Region of China and Singapore also showed that more market participants plan to invest in China's onshore bonds and only eight percent of 180 respondents revealed plans to offload their Chinese onshore bond holdings, according to survey results released Thursday.
The top reason cited by respondents for raising their Chinese onshore bond investments were "the inclusion of yuan-denominated government and policy bank securities in the Bloomberg Barclays Global Aggregate Index starting April 2019, phased in over a 20-month period," read a statement sent to the Global Times disclosing the survey's findings.
China announced last April measures to raise foreign equity caps in the banking, securities and insurance industries, allowing foreign financial institutions to take control of domestic securities brokerages up to the 51-percent ownership level.
Foreign equity restrictions on banks and financial asset management enterprises were removed by the end of 2018, with equal treatment for domestic and foreign-funded institutions. Foreign banks were also given the go-ahead to establish branches and subsidiaries simultaneously in the country.
"Stock connect has proven to be a robust channel to access A shares. The successful implementation of the initial five-percent inclusion of China A shares has been a positive experience for international institutional investors and has fostered their appetite to increase further their exposure to the Chinese mainland equity market," said Remy Briand, MSCI Managing Director and Chairman of the MSCI Index Policy Committee, in a press release on Friday.
Large cap shares increased in three steps rather than two steps, as originally proposed, to alleviate potential pressure on implementation dates, the index provider said. Additionally, a proposal to add ChiNext on the list of eligible stock exchange segments for MSCI received wide approval.
Upon completion of the three-step implementation, there will be 253 large and 168 mid cap China A shares, including 27 from ChiNext on the basis of MSCI, representing a 3.3 percent weight growth, the press release said.
At Friday's close, the benchmark Shanghai Composite Index closed up 1.80 percent to 2,994.01, the smaller Shenzhen index ended up 1.50 percent higher and the ChiNext index, China's NASDAQ-style board, rose 2.10 percent, following the MSCI announcement.
China Securities Regulatory Commission's (CSRC) spokesperson Chang Depeng said Friday that MSCI's decision fully reflects international investors' recognition of China's reform and opening up as well as confidence in the country's healthy economic development.
MSCI's decision to increase the weighting of China A shares in its flagship emerging markets index underlines its recognition of China's efforts to open the country's capital market to overseas investors and allow them to share the growth dividends of its market, analysts said.
It has been estimated that an increase in allocation of A shares from an initial inclusion factor of five percent to 20 percent will bring an inflow of over 410 billion yuan ($61.2 billion) to the A-share market.
The past month which has seen one of the best periods of the Chinese capital market in terms of performance seems to the perfect timing for MSCI's decision to add a new tranche of Chinese stocks to its emerging markets index.
Chinese A-share markets erupted like a volcano on Monday, posting their best daily performance in seven months with the Shanghai Composite Index surging out the psychologically important 2,900-point benchmark.
Total trading volume in Shanghai and Shenzhen, a sign of investor confidence, surpassed 1 trillion yuan, the highest since November 2015. The gains prompted many observers to say that a bull run may have kicked off.
"A further A-share MSCI inclusion doesn't mean an overnight influx of foreign funds into the market, but domestic investors, inspired by a roaring rebound since February, might become motivated to jump into stock trades," Liu Dongliang, a senior analyst at China Merchants Bank Research Institute, told the Global Times.
He shrugged off worries the rebound could be a flash in the pan, explaining the recent up and down fluctuations following a spectacular rebound on Monday are indicative of a congested market.
Following three failed attempts, the mainland stocks were added to MSCI's emerging market benchmarks in June 2017 and two more tranches were included in 2018. These moves failed to pull China A-share markets out of last year's downturn amid the China-US trade tensions, although overseas investment in passive funds following MSCI indexes was supposed to take on A-share exposure.
Analysts believed that increased weighting of A shares in MSCI indexes will increase overseas investors' exposure to China's capital market and 2019 may mark a breakthrough year for foreign inflows to A-share market as the country continues to push ahead financial opening-up.
Gao Ting, head of China Strategy at UBS Securities, said at a press conference via telephone that foreign capital's role in China's A shares is becoming bigger and tend to favor the consumption sector, including home appliance, and food and beverages. "They bet on China's consumption in a long-term view," he noted.
"Compared with investment and exports, the two drivers of China's GDP growth, consumption, is more sound and steady," said Gao.
Along with the MSCI move, China has made gradual steps in recent years to open its capital markets.
In a move aimed at opening up mainland equity markets even further, the State Administration of Foreign Exchange (SAFE), the foreign exchange regulator, announced in January it would double the quota for the Qualified Foreign Institutional Investor (QFII) program to $300 billion.
In addition, the CSRC recently accepted application documents from two foreign-invested institutions for QFII qualification, the first time since April 2018, Caixin reported on Thursday.
As of Wednesday, overseas investors received quotas worth $101.45 billion, slightly higher than $101.35 billion at the end of January, show SAFE data.
A Bloomberg survey conducted among banking and investment professionals in the Hong Kong Special Administrative Region of China and Singapore also showed that more market participants plan to invest in China's onshore bonds and only eight percent of 180 respondents revealed plans to offload their Chinese onshore bond holdings, according to survey results released Thursday.
The top reason cited by respondents for raising their Chinese onshore bond investments were "the inclusion of yuan-denominated government and policy bank securities in the Bloomberg Barclays Global Aggregate Index starting April 2019, phased in over a 20-month period," read a statement sent to the Global Times disclosing the survey's findings.
China announced last April measures to raise foreign equity caps in the banking, securities and insurance industries, allowing foreign financial institutions to take control of domestic securities brokerages up to the 51-percent ownership level.
Foreign equity restrictions on banks and financial asset management enterprises were removed by the end of 2018, with equal treatment for domestic and foreign-funded institutions. Foreign banks were also given the go-ahead to establish branches and subsidiaries simultaneously in the country.
