Inclusion of Chinese stocks in MSCI to usher in an age of value investing
Chinese stocks’ addition to MSCI benchmark indexes after three failed attempts brought good news to the country’s over 100 million shareholders, despite the fact that the 222 China A Large Cap stocks added to the index will comprise just 0.7 percent of MSCI’s global emerging-markets gauge.
 
International analysts predict the progress at the current stage would have little effect on drawing foreign money into the nation’s $6.9 trillion stock market, while Chinese regulators say the milestone integration with the global financial system would attract long-term funds and give a spur to renminbi internationalization.
 
So, it will have a definite effect on the world’s second-largest stock market, which has long been an enigma to foreign investors because of its unpredictability, frequent trading suspension and limited foreign investor access to the Shanghai and Shenzhen stock markets.
 
MSCI Chairman and CEO Henry Fernandez predicted the initial capital flow would scale to $17bn to $18bn, and when the A-shares are totally included in the MSCI indexes, the expected capital inflow may go beyond $340bn.
 
Some analysts indicate foreign institutional investors prefer value investing and long-term shareholding, that explains why most of the included 222 equities are Blue Chip large-cap shares already accessible to foreigners through the Hong Kong stock connect program with the Shanghai and Shenzhen exchanges. In their view, with the inclusion, the A-share market would continue to place value on Blue Chips and become more geared to the international standards.
 
Fang Xinghai, vice chairman of the China Securities Regulatory Commission (CSRC), told China Central Television on Wednesday the CSRC has negotiated some conditions with MSCI about Chinese equities’ inclusion.
 
Fang expects some international long-term capital inflows into China’s A-share market to further intensify the value investing trend, although he noted daily trading limits through the Hong Kong exchange links need to be further relaxed. About widespread worries about financial risks, Fang pledged the CSRC would ratify some derivative instruments of A-shares overseas to address the problem.
 
He predicts the move would help curb long-term trading halts and give a spur to the development of domestic derivative instruments.
 
“Major international institutional investors are bullish on China, betting China could lead. Meanwhile, when foreign funds trade Chinese stocks, renminbi internationalization would sped up to meet the exchange demand,” Fang said, talking about the positive effects of the move.
 
Industry insiders with the Pingan-UOB Fund told National Business Daily although joining MSCI would bring up stock market index like it already did in Chinese Taipei and South Korea, the ensuing incremental capital in China will only comprise a tiny proportion of A-share capitalization. From the initial select inclusion to a comprehensive inclusion of stocks, there is a long way to go and so positive effects could only be seen in the long term.
 
It is noted before the result came out, foreign funds had started to flow into A shares. From January to May, it is recorded that Rmb 49.3bn went offshore through Hong Kong stock connect program, while from June, capital began to flow into mainland China, with net amount hitting Rmb 9.7bn just between June 5 and 16.
 
According to a National Business Daily report, the included 222 A shares mostly center on traditional industries with finance being the mainstream, while TMT (Technology, Media and Telecom) shares account for much less.
 
BOCI Securities believes the A-share addition to the index would lead international investors into China’s market, with not only capital inflow, but more importantly the changes in investment style and philosophy. The first half of the year has already seen a mixed performance in the A-share market, with big stocks going up while small ones dipping. It is predicted the divide would expand in the second half. 

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