SHANGHAI: China on Wednesday hailed the decision by index compiler MSCI to include it in its key emerging markets list, saying it was a signal of confidence in the world’s number-two economy.
The agreement to admit mainland-listed big-cap stocks — allowing them to be traded by foreigners — comes after three failed attempts as China’s leaders aimed to expand its global market influence.
Analysts said inclusion on the Emerging Markets Index could lead to up to $12 billion of inflows as many overseas investors measure the performance of their portfolios against MSCI indexes and are obliged to buy shares in them.
“We applaud and appreciate MSCI for making such a decision,” said Zhang Xiaojun, spokesman for the China Securities Regulatory Commission.
“It showed international investors’ confidence in a stable Chinese economy with better prospects and in the steadiness of China’s financial market,” Zhang said.
MSCI’s nod also comes after the domestic market was rocked by painful plunges in 2015 and 2016, and a liquidity crisis fuelled by Beijing’s recent efforts to tighten credit over concerns the country’s massive debt could trigger a financial meltdown.
The benchmark Shanghai Composite Index was up 0.15 percent by midday while the Shenzhen Composite Index, which tracks stocks on China’s second exchange, was 0.05 percent higher — both bucking a downturn on other Asian markets.
MSCI said the move has “broad support” from international institutional investors and was the result of loosening of restrictions enacted by China on foreign ownership of “A” shares — yuan-denominated stock in mainland China-based companies. Ownership of the shares had once been limited to mainlanders.
China has been gradually opening its A share market to foreigners, allowing them to trade selected stocks in Shanghai and Shenzhen through mechanisms linking those markets to Hong Kong.
Overseas investors have also been allowed to buy A shares through a quota system.
But for the most part they have been restricted to “B” shares denominated in US or Hong Kong dollars and traded in Shanghai and Shenzhen, or “H” shares traded in Hong Kong. “International investors have embraced the positive changes in the accessibility of the China A shares market over the last few years and now all conditions are set for MSCI to proceed with the first step of the inclusion,” said MSCI managing director Remy Briand.
“MSCI is very hopeful that the momentum of positive change witnessed in China over the past years will continue to accelerate.”
MSCI says its emerging markets index is tracked by more than $1.5 trillion in assets, adding that Chinese representation in the index could be increased in time if it enacts additional reforms.
China had failed on three previous occasions to be included by MSCI, with the US-based firm citing China’s restrictions on market access and on moving capital in and out of the country.
“We reflected the comments from the institutional investor community. They (Chinese officials) took them very seriously and acted upon some of them,” MSCI chief executive Henry Fernandez told CNBC. |
Institutional investors praised a decrease in the number of stock suspensions in China, but said the current level is still an “outlier” compared with other markets, MSCI said.
Chinese shares will join the index in June next year.
However, observers said the small number of firms taking part — 222 large-cap firms will join initially meaning they make up just 0.73 percent of the overall index — meant there would be little early impact.
Capital Economics described it as “a token inclusion”, while ANZ Research said “the more progress that Chinese regulators make on liberalisation, the greater the potential for further inclusion”.
Nevertheless, admission to the index was seen as a good start.
“A low number of shares and weighting is not important at the beginning,” said Li Daxiao, chief economist at Yingda Securities. “It is like opening a door. Even if it is just a crack, it is a huge improvement compared to being completely shut.”
And while the expected inflows would be a “drop in the bucket” and would do little to alleviate the liquidity problem in the short term, it could boost confidence in the Chinese market over time, said Northeast Securities analyst Shen Zhengyang.
“Investors might feel that the Chinese market will become more regulated, more mature and more international,” Shen said.