MSCI set to add 200 China onshore stocks

The index provider said in a statement that following the semi-annual index review, a batch of 234 large-cap A-shares will be included in its global and regional indices from June.

The 234 companies were the result of tweaking the MSCI China A Inclusion Index, which will be embedded in MSCI’s global indices. Officials said a total of 11 companies were added and nine deleted from the inclusion index.

The onshore companies to be added account for 6.6% of 3564 companies listed onshore.

In terms of sector breakdown, more than one-fifth of the batch belongs to the financial sector, including the country’s first and second largest banks, the Industrial and Commerce Bank of China and China Construction Bank.

The second phase of the inclusion will take place in September. It is expected that, after the two stages of inclusion, China’s A-shares will carry a small 0.78% weight in the MSCI Emerging Markets Index (China as a geography represents about 40% of the index).

The group of 234 Chinese stocks will also become index constituents in the MSCI Global Standard Index from June.

More foreign investors

Hong Kong-based CSOP Asset Management estimates the inclusion will create capital inflows of only $400bn in total in the next ten years.

However, foreign capital in China’s onshore equity market is expected to rise to 20% when A-shares are fully included in the MSCI indices, said Louis Lu, CSOP’s head of quantitative and alternative investments, at a press conference.

To date, foreign investors in China’s onshore equity market account for only around 2% of the entire market capitalisation.

“The MSCI inclusion would lead to a material increase in the number of foreign investors. The inclusion of South Korea stocks showed a growth to 18% from merely 6%,” Lu added.

Institutional investors in Southeast Asia and the Middle East would be more interested in allocating to China after the official inclusion, said Melody He, the firm’s head of sales and product strategy.

“High net worth investors and institutions in Southeast Asia and the Middle East have certain interests in China’s market due to trade relations China has with the countries. In addition, more investors from these regions are seeking to build up a portfolio of global allocation with an exposure to China,” she added.

Large-scale asset managers from Europe and the US are another group of investors that could potentially put more capital into China equities. However, some conservative pension funds may act slowly and require up to three years before investing, according to He.

In Hong Kong, there are two exchange-traded funds that track the stocks being included into the MSCI indices. They are the CSOP MSCI China A Inclusion Index ETF and the China AMC MSCI China A Inclusion Index ETF.

Last month, the daily quota cap for the cross-border Stock Connect programme was increased to address an expected increase in foreign investors’ demand for A-shares after the inclusion. Global portfolios will need to add exposure to China’s A-shares, which will likely require a larger amount of Stock Connect quota.

The first batch for inclusion

Source: MSCI