Chinese shares surged on Friday after the global index provider, MSCI lifted the number of Chinese companies that would be included in its key emerging markets index.
The Shanghai market jumped 6.7% last week pushed higher by a 2% gain on Friday in the wake of the News from MSCI.
That, in turn, dragged the Shanghai market – China’s largest – into bull market territory with a gain so far in 2019 of just over 20%.
MSCI’s decision to increase the Chinese weighting in its influential emerging markets index is seen as a major step to integrating the country’s domestic stock markets with international capital markets.
MSCI lifted the inclusion factor for the country’s so-called “A-shares” to 20% with 230 of these A share companies being included in the index.
Analysts say this could see an estimated $US125 billion flowing into Chinese equities this year with the changes happening gradually over this year.
In effect, MSCI announced it would quadruple China’s weighting in the emerging markets index (which the Financial Times says its tracked by $US1.9 trillion of funds globally), to 3.3% by November this year from 0.71%.
Funds that benchmark their performance against the index are obliged to buy the underlying stocks, triggering inflows to China.
As well, administrators of the widely used Bloomberg Barclays Global Aggregate Index said starting in April they will include Chinese fixed-income securities among those referenced in its index basket
“At the end of the day, [MSCI A-share inclusion] is driven by the [Chinese] authorities,” said Remy Briand, chairman of the MSCI index policy committee. “They have been very active.”
Chinese stocks listed offshore in Hong Kong and the US already feature broadly in the MSCI Emerging Markets Index with a 31% weighting, according to the FT.
“The importance of MSCI’s latest decision is that it creates a stronger link between the domestic Chinese stock market — the second largest in the world — and international capital. By November this year, the total weighting in the MSCI index for offshore and domestic Chinese stocks will be about 34.3 percent — by far the largest country weight.
“Expectations for the MSCI decision has already driven huge inflows, helping propel the CSI 300 — China’s benchmark equity index — to a 22 percent increase this year. This surge reversed a slump in the final quarter of last year,“ the FT pointed out.
Some analysts caution that transparency, disclosure, and accounting will be major issues for foreign investors to watch for with Chinese shares.
“Nevertheless, the addition of so many Chinese stocks that are often troubled by poor governance and insufficient transparency could prove a headache to some international investors.“ the FT added.
