But its decision matters to asset managers who track their performance against MSCI’s indices or who invest in exchange-traded funds linked to them.
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Given that the Beijing government is also stepping up its interference in corporate affairs by insisting that Communist Party committees be established at state firms, some governance activists are questioning MSCI’s decision. Many investors will use the CCI in conjunction with other indicators when evaluating a trade. Review DailyFX’s Trading Guides and watch DailyFX webinars.
As widely anticipated, MSCI (MSCI – Free Report) announced yesterday that it will include China A shares in the MSCI Emerging Markets Index and the MSCI ACWI Index, beginning June 2018.
ANALYST’S TAKE: “Chinese authorities have been garnering for this positive decision and this recognition of the country’s efforts in opening up the financial market could really encourage more to be done that could lead to greater capital inflows”, Jingyi Pan, a market strategist at IG in Singapore, said in a daily commentary.
But while high on symbolism and good for the Chinese economy, the move may be much less impactful to institutional investors where it matters most: generating outsize returns.
These A-share stocks only account for 0.73 per cent of the index’s weighting, based on a 5 per cent initial inclusion factor. Registering the best week in 2017 so far, CSI300 soared 3%, while the SSEC rose 1.1%.
On the contrary, indices in other major Asian economies all dropped.
Following the announcement from MSCI the South Korean stock market fell, with Seoul’s Kospi index closing down 0.5 per cent at 2,357.53. Many of them would be big-cap blue chips. Weighting of A shares in MSCI indexes would be increased gradually. These “Stock Connect” links give foreign investors wider access to the mainland’s markets, which are mostly restricted to local investors. These include opportunities in the Chinese technology sector – particularly financial technology, where mobile payment systems are leapfrogging their developed-market counterparts – and consumer consumption driven by the wealth effect and rising wages.
MSCI may revise the implementation road map to a single phase if the daily limit on Stock Connect trading were to be abolished or significantly expanded before the scheduled inclusion dates. UK’s divorce with the European Union has escalated the process of such an introduction.
“We are happy to see it”, Zhang Xiaojun, a spokesman for the China Securities Regulatory Commission, said in a statement on the agency’s website.
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Sebastien Lieblich, global head of index management research at MSCI declined, however, to provide a likely timeline for the full inclusion of “A” shares, saying it would depend on continued progress on China’s reform agenda. This may have investors scrambling to study if developing markets are indeed growing with developed markets. For businesses with top line revenues that can top $15bn, this should have been fixed by now’. Currently, the offshore Yuan pair is still testing the upper bound of this channel.
