The A-share market is ready to embrace further opening-up to international investors as the benchmark Morgan Stanley Capital International index starts a new round of inclusion of A shares.
The MSCI announced on Aug 14 that it will implement the second step of the partial inclusion of China’s A shares in the MSCI China Index and relevant composite indexes such as the MSCI Emerging Market Index.
The inclusion will take effect when the market closes on Aug 31. The next half-year index review is scheduled on Nov 13.
A total of 10 companies will be added in the second step, with the total China A shares included in the MSCI China Index reaching 236. With that, the constituents’ weight in the MSCI China index will rise to 5 percent from the 2.5 percent realized in June. It also equals to 0.75 percent weighting on the MSCI Emerging Markets Index.
The 10 newly added companies include industry heavyweights such as China Shenhua Energy Company Ltd, China Unicom, ZTE Corporation, software company Yonyou Network and consumer electronics giant TCL Corporation.
But the MSCI warned that companies will be eliminated from its index if they still suspend trading the day before the adjusted inclusion takes effect.
Industry insiders said the second step inclusion will further bring an inflow of foreign capital in succession to that which started in late May.
The Shanghai Stock Exchange wrote in a note in late May that the foreign capital inflow into the MSCI included A shares via the Shanghai Hong Kong Stock Connect surged substantially to 11.27 billion yuan ($1.64 billion) on May 31－the day prior to June 1 when the MSCI index took effect. That number hit the record high during the first half of this year, which was also 2.5 times the average amount of the monthly total.
Analysts from China Merchants Securities wrote in a report that the A-share market’s 5 percent inclusion will hopefully bring another 40 billion yuan of investment into the Chinese stock market. Experts from Shenwan Hongyuan Securities predicted that the additional inflow of foreign capital will amount to 1.8 trillion yuan in the long run if the A shares could be 100 percent included into the MSCI index.
Jack Lee, head of China A-share Research at asset management company Schroders Plc, said that more overseas capital is sure to flow into the A-share market, especially focusing on the consumption sector, which is closely related to economic growth.
MSCI is one of the most influential stock indices worldwide that is adopted by over 97 percent of the world’s top asset management firms. With its move in China, another major industry indicator FTSE Russell, based in London, said that it would include the A shares in September with higher weighting.
Shi Bin, head of China Equities at UBS Asset Management, said that overseas investors will more gradually understand the structural changes undergoing in China and actively look for opportunities in the A-share market as it becomes more open.
“Although the inclusion into the MSCI index will not boost A shares in the short term, it will improve the market’s structure and performance in the long run as the A-share listed companies have to face stricter supervision and compliance regulations in line with international standards,” he said.
More importantly, Shi pointed out that the inclusion also reflects the international market’s acknowledgement of the achievements that China has made with its reform and opening-up policies. Overseas investors have come to realize that the onshore Chinese market is more closely connected to the global financial system after the introduction of the stock connect mechanism between Shanghai, Shenzhen and Hong Kong, he said.