MSCI inclusion a boon for A shares

Adding Chinese shares to the index is not simply an addition of numbers; it will have 'multiple effects' on the global market

US financial index provider MSCI's decision on June 20 to include the Chinese mainland's stocks in its widely tracked MSCI Emerging Markets Index and All Country World Index in June 2018 could create a wind fall of tens of billions of US dollars from asset managers, pension funds and insurers for the mainland's equity markets over the next decade, according to analysts. The decision ill also help China open up its capital market, though the road to the internationalization of the country's A-share market is still not as smooth.

"This decision has broad support from international institutional investors with whom MSCI consulted, primarily as a result of the positive impact on the accessibility of China's A-share market of both the Stock Connect program and the loosening by the local Chinese stock exchanges of pre-approval requirements that can restrict the creation of index-linked investment vehicles globally," MSCI said in a statement.

The inclusion of Chinese shares in the MSCI index is not simply an addition of numbers; it will have "multiple effects" on the global market.

The global stock market is dominated by the US, European and Asia-Pacific markets, but now emerging economies' markets have also become an important component of it. Yet, free flow of capital remains the most vibrant element of the global stock market.

The globalization of capital is based on interconnectivity of global stock markets and their full opening-up, which calls for establishing a global index system as a reference for investors. The MSCI happens to be such an index: It is widely used by professional investors, including portfolio managers, stock traders and bourses across the world. Of the 100 largest global asset managers, 97 are MSCI clients.

US, European and Asia-Pacific stock markets, along with those of a majority of emerging economies, have been included in the MSCI index, helping the US index provider form a stake-holding relationship with the global stock market. Because of this close connection, fluctuations in major global economies usually cause repercussions and chain reactions in global stock markets.

As the world's second-largest economy, China is now a major locomotive of the global economy, and thus its A-share market should play a bigger role in the global capital market.

The continued exclusion of China, one of the world's most vibrant emerging stock markets, from the global capital market will compromise the status of the benchmark global stock market index. As a result, it cannot meet global investors' demands in the long run.

So the inclusion of China's A-share market in the MSCI index will be a win-win result for all-the Chinese stock market, the MSCI as well as global investors.

Most analysts believe the inclusion will bring in funds from more global institutional investors. According to estimates, the MSCI now has about $10.5 trillion (9.3 trillion euros; ￡8.2 trillion) worth of assets benchmarked against it, with $2.8 trillion tracking the All Country World Index, $1.5 trillion tracking the Emerging Markets Index and $200 billion tracking the Asian market index. The weightages held by China's A shares in the three indexes are 0.1 percent, 0.5 percent and 0.6 percent, respectively.

This means that after China's inclusion in the MSCI index, the domestic stock market could attract at least $10 billion in funds, thereby considerably raising the percentage of foreign investors in mainland stocks.

However, considering the daily trading of $70 billion in the A-share market, the in flow of foreign capital is not expected to substantially affect its development trend.

Instead, many say, the inclusion will create more reform pressure on China's stock market.

Current reforms are mainly confined to policy regulation aimed at eradicating known problems and malpractices. As such, longer term institutional reforms and the experiences of mature markets overseas should also be introduced to China's stock market.

It is hoped the MSCI's decision will help Chinese retail investors to shift from blind and hearsay-based investment to reasonable and sensible investment.

The author is an economics analyst.

The article was first published in Beijing Youth Daily. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 06/30/2017 page12)