The chance that MSCI will include China A-shares in the MSCI China and other regional and international benchmark indices in June has increased, Kam told FSA.
“The chances for inclusion have increased over the past months on the back of a few events that have taken place. Specifically, there were a couple of issues that MSCI flagged last year that could potentially hold up their decision. But in May, we have some resolution of the issues.”
For example, the China Securities Regulatory Commission in early May has cleared up the issue of beneficial ownership of QFII and RQFII schemes.
Kam said if MSCI decides to include A-shares, the passive funds that track the MSCI will have to buy A-shares. He expects passive inflows of about $24-25bn if A-shares are included in the global and the emerging market indices. But a positive decision would only take effect from June 2017.
China shares at crisis lows
The MSCI China index is trading at 1.29x price-to-book ratio, which is lower than the 1.5x P/B in October 2008 during the global financial crisis and close to 1.22x P/B in April during the outbreak of the severe acute respiratory syndrome (SARS).
A Chinese offical said in May that the government would refrain from large-scale measures aimed at sparking growth, such as stock and property market intervention and currency support. Citing an unidentified “authoritative person”, the state-run People’s Daily reported last month that Chinese economy must face up to its nonperforming loans and other risks associated with soaring debt levels.
The unnamed source also admitted that China’s economic trend in the coming years will be “L-shaped”, rather than “U-shaped”, and definitely not “V-shaped”, due to weak demand and overcapacity.
For the offshore market (China ADRs), HSBC said it has increased exposure to the information technology sector, mainly through investing in selective names with positive earnings and margins outlook. “This is also aimed to better capture the potential upside ahead of the full ADR inclusion in May.”
Among Chinese stocks, Kam said he prefers the property and the auto sectors, given their positive industry outlook and attractive valuations.
Among China indices, A-shares have beaten H-shares over the past three years. But generally China stocks have fallen out of favour with global investors.