MSCI Inclusion Should Intensify Scrutiny of Chinese Shares

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China's inclusion in the MSCI Emerging Markets Index may be a big boost for China, what would it hurt other emerging markets like Taiwan and India?

"The initial impact on the composition of regional and global indices will be extremely modest", said Nick Beecroft, portfolio specialist of Asian equity at T. Rowe Price in Hong Kong.

"There is not a major push at the moment among our clients for inclusion", Makepeace told Reuters in an interview on Tuesday. While the inclusion bodes well for large-cap blue chips, slowing growth suggests allocations toward these stocks, with or without the inclusion.

Shanghai shares opened just 0.3 per cent higher, dipped into negative territory, and then rallied to end the day up 0.5 per cent.

The blue-chip CSI300 index shook off a bout of early profit taking to end up 1.2 percent at 3,587.96 points, its highest close since December 31, 2015.

The 222 companies to be included on the MSCI Emerging Markets Index are already available to foreign investors on the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect, she said.

The "A" shares are expected to make up only 0.5 per cent of the emerging markets index once they are added.

The bulk of the shares will be financial and industrial companies, many state-owned. Stocks suspended from trading more than 50 days are excluded.

Inclusion in MSCI indexes will spur about $8 billion to $10 billion more in fund flows to China's A shares, according to Lucy Qiu, an analyst at UBS Wealth Management's Chief Investment Office, which oversees strategy for $2.2 trillion in assets.

For instance, Hong Kong, long regarded as a China proxy with more than 70 percent of listed companies' earnings from the mainland, is still seeing 20 percent discount of its H shares relative to A shares. The markets pared losses by half from the late morning trade by the time they closed. "It's very hard for us to articulate any type of timeline with respect to further inclusion", Lieblich told reporters.

The move, which was widely anticipated, could trigger an inflow of as much as $210 billion into China's equities over the next five years, according to Goldman Sachs.

He added: "When further alignment with worldwide market accessibility standards occurs, sustained accessibility is proven within Stock Connect and global institutional investors gain further experience in the market, MSCI will reflect a higher representation of China A-shares in the MSCI Emerging Markets index".

But that access is available today, he had pointed out, thanks largely to the launch of connect trading.

Global equity indexes provider MSCI announced Tuesday that beginning in June 2018, it will include China A-shares in the MSCI Emerging Markets (EM) Index and the MSCI ACWI Index.

That means fund managers in the USA and overseas will likely invest billions into Chinese equities traded in Shanghai and Shenzhen.

BlackRock Inc, the world's largest asset manager, endorsed MSCI's decision. "There is no point in us trying to do something if we don't have the support of our clients". Smaller numbers to be included in the MSCI will limit any serious impact on other markets.

Listing Aramco in Riyadh would approximately double Saudi Arabia's weighting in the emerging markets index, fund managers estimate, possibly making the kingdom a bigger presence in the index than Russian Federation and Mexico.