A big test for the Australian stockmarket and the Australian dollar early Wednesday, Sydney time (and for other markets and currencies) when MSCI faces yet another decision on whether to include some of China’s major companies in one of its key global indexes.
It will be a massive decision and many analysts think the chances have risen of a positive decision, especially as MSCI has trimmed the number of Chinese companies and their share in its emerging markets index, if it says yes.
A positive decision won’t have an overnight impact, but billions of dollars will flow over time from big global investors from existing markets (including Australia’s) into Chinese shares. It will be the fourth time in as many years that MSCI has debated whether to include china in its key emerging markets index.
In April, BlackRock, the world’s largest asset manager reversed its previous opposition to the idea of China’s inclusion, saying it now supported bringing domestic Chinese shares into the MSCI’s global indices.
And Fidelity, another large investor, also strikes an upbeat tone. Fidelity’s Tim Orchard, the chief investment officer in the Asia Pacific (ex-Japan), told the Financial Times: “As access to China’s onshore equity market widens, it is natural for these stocks to be gradually included in equity market indices.”
They got close last year, but after a couple of big stockmarket sell offs and the involvement of the Chinese government in market support measures (some would call it market manipulation and other fears about corporate governance), MSCI said no.
That could see a period of weakness for the local market and a sell off in the Aussie dollar because both have been seen as proxies for the China given our big exposure via our dependence on exports to China and the sensitivity of the market and currency to moves in commodity prices such as iron ore.
If MSCI which overseas a family of regional and global stock and bond market indexes, approves the inclusion of a group of Shanghai and Shenzhen-listed A-Shares into its main emerging markets index, it will force funds all over the world to pour billions into the country’s stocks.
That will include big global investors and Australian based funds – even our Future Fund or rather its share managers will have to re-allocate funds from some markets into China.
Although mainland-listed Chinese stocks and bonds have already been included in several investment sub-indices (such as those from Vanguard, a big US money manager), they have yet to move into an international benchmark index.
According to the Financial Times China’s $US7 trillion A-share markets and its $US9.3 trillion domestic bond market (the world’s second and third largest respectively) are off limits to most foreign investors “because governance problems dissuade index providers from including them in their benchmarks."
The FT points out that moves by MSCI have raised the possibility of a positive vote for China. MSCI has trimmed its inclusion proposal “ o make it more palatable to its clients.
It cut the list of stocks to be included in the benchmark index to 169 from 448 previously, meaning that if A-shares win entry they will account for just 0.5% of the MSCI EM Index, down from 5% in under the previous proposal in 2016.
Among the 169 stocks, MSCI will not allow the inclusion of companies that have been suspended from trading for more than 50 days, as well as those that do not have sufficiently large capitalisations. They also adjusted the weightings to reflect investor preferences for consumer stocks over financials.
But there will still be problems. Anbang, a big insurer and financial conglomerate say its shares and those of its associated companies sold off this week when it confirmed that its chairman had been held by authorities for questioning.
Anbang said on Tuesday its chairman Wu Xiaohui was no longer able to fulfil his duties. Hours earlier, Chinese magazine Caijing reported that Mr Wu had been taken away for investigation.
Anbang-invested shares – including Financial Street Holdings , China Vanke, China Merchants Shekou , Gemdale and China State Construction Engineering – all dropped sharply last week. This move alone could be enough to make MSCI hestitate.
And there are several other big companies where something similar has happened in the past year – especially as China’s anti-corruption campaign has snared leading business figures.
That is hard for investors of all types, let alone foreigners, to invest with confidence.
MSCI has "effectively dropped a market access objection that related to the Qualified Foreign Institutional Investor scheme. This channel allows approved foreign funds access to A-shares but under conditions that limit their ability to repatriate their money — an issue flagged by MSCI last year when it rejected the inclusion of A shares,” according to the FT.
