Share of worldwide index delivers breakthrough for China


Brendan Ahern, chief investment officer at Krane Fund Advisors, told Xinhua on Tuesday that the MSCI inclusion begins "adjusting China's weight within global equity indices to match its importance to the global economy".

With implementation scheduled for May/August 2018, the current inclusion implies that A-shares will only make up 0.7% of the MSCI Global Emerging Markets Index, 0.8% of MSCI Asia Ex-Japan, 2.6% of MSCI China and less than 0.1% of the MSCI All Country World Index.

'The markets have been relaxed about the potential inclusion of Chinese A-shares in the MSCI, as the amount included is small.

The China Securities Regulatory Commission, the country's securities watchdog, said in a statement that inclusion was "both an opportunity and a challenge for reform" and that China would continue to try to internationalise its market while promoting stability at home. "We expect China could follow a similar path, taking five-to-ten years to full inclusion, with a gradual increase in inclusion weights along the way as capital flow restrictions are reduced and the A-share market converges closer to global rules".

That means funds that track the index will need to put more money into China's stock market.

MSCI estimates initial inflows could reach US$17-18 billion following the partial inclusion.

This was based on data provided by BlackRock's iShares MSCI Emerging Markets ETF and SPDR MSCI EM UCITS ETF.

The Hang Seng index added 0.6 percent, to 25,839.29 points, while the Hong Kong China Enterprises Index gained 1.1 percent, to 10,504.11. Assistant Vice-President and Head of Research Cristina S. Ulang said in an e-mail the MSCI action will result in "displacement" in its global country weightings, resulting in "shrinking foreign flows into emerging markets including the Philippines".

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Hence, we believe the market impact is likely to be muted considering the size and the long timeline to implement this.

The MSCI EM Index is tracked by US$1.6 trillion worth of assets and is used as a benchmark index by many emerging market mutual funds.

China is larger and arguably, more complicated than Taiwan or Korea.

The CSI 300 Index of large companies listed in Shanghai and Shenzhen jumped 1% in the morning session Thursday, poised for its highest close since December 2015.

"China's policymakers have already made important strides in opening capital markets to global investors.MSCI inclusion should be a catalyst to accelerate that process - working to maximize gains to efficiency from global integration and minimize disruptions from destabilizing short-term flows".

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

That translates into US$1.8 billion, US$1.4 billion, and US$1 billion of net selling separately for three economies, Goldman analysts said. If given full factor inclusion, China's weighting, including offshore HK-listed shares, could potentially quadruple to an estimated 8%.

This represents a decline from 3.09 per cent from May 2016 generally due to the weaker performance of the local stock market and the ringgit against the United States dollar versus their peers in the index.