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China gains entry to MSCI’s $1.6tn global index
Decision marks a milestone in Beijing’s efforts to attract foreign funds
3 HOURS AGO
© FT montage; Reuters
39 MINUTES AGO by: Jennifer Hughes in Hong Kong and Nicole Bullock in New York
Chinese stocks have gained direct entry to MSCI’s global benchmark equity index for the first time, marking a milestone in Beijing’s efforts to draw international funds into the world’s second-largest market.
The move means mainland equities, known as A-shares, will next year be included in MSCI’s flagship emerging markets index, obliging the estimated $1.6tn of investment funds that track the index to buy the stocks.
The index provider’s decision opens a new front in investors’ long-running debate over whether, and how, to introduce domestic Chinese securities into international portfolios.
China’s equity and bond markets are the second- and third-largest in the world, respectively, yet foreigners hold less than 2 per cent of each. Three previous proposals by MSCI to include mainland stocks had been rebuffed by the index provider’s stakeholders — primarily large asset managers.
“International investors have embraced the positive changes in the accessibility of the China A-shares market over the past few years,” said Remy Briand, MSCI managing director and chairman of the MSCI index policy committee.
The company said its decision had “broad support” from institutional investors mostly thanks to improved access to A-shares via the Stock Connect programme that links Hong Kong with Shanghai and Shenzhen without subjecting investors to the same capital restrictions they would face buying shares on the mainland using renminbi.
Chinese exchanges also in the past year have eased their requirements to pre-approve index-linked products — previously a key sticking point for fund managers.
Helen Wong, head of HSBC’s Greater China operations, called MSCI’s decision a “pivotal moment.”
She added: ”This is the start of a process through which Chinese equities will achieve a prominence in global investors’ portfolios that reflects the size and significance of China’s domestic stock market and its economy.”
MSCI said it would add 222 A-share large-cap stocks that will account for 0.73 per cent of its flagship index. That is higher than the 169 stocks originally proposed, after investors told the index provider they wanted to include the A-share version of companies that already had a listing in Hong Kong via which they were already included in MSCI’s indices.
“Now that MSCI has decided to include A-shares in their indices, the gravitational importance of China A-shares is confirmed,” said Karine Hirn, partner at East Capital, an emerging markets specialist, who predicted that in the long-term, domestic Chinese stocks could represent up to 20 per cent of the index.
Investors’ wariness had centred on China’s weak corporate governance, concerns over how it polices its stock markets, and the difficulties money managers face when repatriating funds on demand. Anxiety about the latter was amplified by Beijing’s heavy-handed response to the 2015 market crash, where at one point more than half of all stocks were suspended from trading and officials forced local institutions to contribute to a bailout fund.
But even as it gave the go-ahead, MSCI warned that greater inclusion would require further reforms.
“Future inclusion will be subject to a greater alignment of China with international accessibility and trading standards,” said Sebastien Lieblich, MSCI’s global head of index management research.
Global index providers have long danced around the issue of including domestic Chinese securities in their flagship products. Until MSCI’s decision, the farthest any had gone was providing a so-called “parallel universe” system — introduced by FTSE and by Bloomberg — where followers had the choice of a benchmark that added mainland assets or one that maintained the status quo and excluded them.
China-related stocks already make up 27 per cent of MSCI’s emerging markets index but this consists of shares listed in Hong Kong and the US such as Chinese tech giants Tencent and Alibaba.
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