China’s stock market is about to go global like never before.
On June 1, MSCI Inc. will add distiller Kweichow Moutai Co., brokerage Guosen Securities Co. and more than 200 other locally listed Chinese companies to benchmark equity gauges that guide the investment of US$12 trillion. The New York-based index compiler will publish its final selection of so-called A shares on Monday, putting many of them on the buy lists of international retirement plans, endowments and exchange-traded funds for the first time.
It’s a major symbolic win for China, which for years has craved greater global recognition of its financial markets and a bigger international role for its currency. While foreign investors still have concerns about everything from China’s debt risks to state intervention and capital controls, many are keen to increase their exposure to a US$13 trillion economy that’s growing twice as fast as the U.S.
“Overall the addition of China A shares is symbolic of China’s increased liberalization of financial markets and represents a new era where China is a true player in global markets,” said Eleanor Creagh, Sydney-based market strategist for Saxo Capital Markets.
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While China’s initial weighting in the MSCI Emerging Markets Index — at 0.7 per cent — is minuscule, that may grow to as much as 14 per cent over time as market rules align with international standards, Creagh said. The initial inclusion will be spread across two trading days on June and September and is expected to channel around US$17 billion in passive funds into the world’s second-biggest equity market and inflows could rise to US$35 billion in coming years, MSCI has said.
The inclusion into MSCI indexes has been several years in the making. Institutional investor worries around accessibility halted earlier efforts by MSCI to add A shares to its Emerging Markets Index and other gauges. After 2013, when MSCI added them to a review list, three annual consultations ended with a ‘No’ from investors. Trading mechanisms, tax treatment and capital withdrawal rules were among concerns raised, the consultations found.
Many of those challenges still remain. China, which allowed more than half of its listed firms to suspend trading at the peak of a US$5 trillion rout in 2015, hasn’t broken its habit of intervening during market turmoil.
Progress on trading suspension rules was identified by MSCI as a precursor for further inclusion. As China has steadily been expanding stock links between the mainland and Hong Kong, making it easier for international investors to own A shares, the resilience of the trading system will also be a factor in greater inclusion, MSCI said.
China has been laying the groundwork for greater global inclusion for years, including a recent increase in daily trading limits for investing through the links. Foreigners’ purchases of mainland shares via the stock links surged to a record last month.
Some money managers will struggle initially with unfamiliar names. Only 70 out of more than 200 non-Chinese institutional managers tracked by Investment Technology Group Inc. had traded China-listed stocks in the past five years. Still, foreign managers have gotten a chance to dip their toes into China’s US$7.6 trillion market through stock links. Favoured picks in Shanghai so far include brokerages and airport operators, according to data from Hong Kong Exchanges & Clearing Ltd.
Although global money managers have long invested in Chinese stocks with New York and Hong Kong listings — such as Alibaba Group Holding Ltd. and Tencent Holdings Ltd. — China’s domestic market offers exposure to a wider group of companies that benefit from an increasingly consumer-led economy. And from a valuation perspective, it’s not a bad time to be entering the market: China’s local shares are priced near a record low relative to their overseas-listed counterparts.
The significance of MSCI’s action is the signal it sends to institutions about entering the domestic Chinese market, said Aaron Boesky, chief executive officer of Hong Kong-based Marco Polo Pure Asset Management. MSCI has deemed that China’s regulatory environment, liquidity environment and accounting principles are satisfactory, he said.