An important global 'club' is thinking about giving more importance to Chinese stocks -- and prices are soaring

PETER PARKS / AFP / Getty ImagesPETER PARKS / AFP / Getty Images
  • Chinese stocks surged on Wednesday on news the MSCI is considering a big increase in China’s weighting in its benchmark indices in the coming years.
  • The SSE 50 Index — comprising the largest stocks listed in Shanghai — is currently up 2% and at a three-month high.
  • Strategists say the size of the proposed weighting increase was far larger than markets expected.

Fresh from logging their largest percentage gain in years on Friday, Chinese large cap stocks are charging yet again, bolstered by news the influential MSCI is considering upping the weighting given to mainland Chinese stocks in its benchmark indexes.

“[We are launching] a consultation on a further weight increase of China A shares in the MSCI Indexes,” MSCI said in a statement on its website.

“As part of this consultation, MSCI proposes to increase the inclusion factor of MSCI China A Large Cap securities from 5% to 20% of their respective free float‐adjusted market capitalisations in two phases coinciding with the May 2019 Semi‐Annual Index Review and August 2019 Quarterly Index Review.”

MSCI indexes are used as the baseline for exchanged traded funds. Some investment funds and wealth managers will have a policy of buying certain levels of stocks or indices based on their MSCI inclusion and weighting.

MSCI said the consultation includes adding eligible stocks listed on the tech-heavy ChiNext Exchange starting from May 2019, as well as mid-cap mainland stocks as part of its May 2020 review.

It said move follows the “successful implementation” of the 5% initial inclusion of China A shares in the MSCI China Indexes and related composite indexes, back in May and August this year.

While still to be approved, the substantial increase in China’s weighting in these benchmark indexes has helped pushed Chinese stocks sharply higher following the announcement.

Here’s the scoreboard at the mid-session break on Wednesday.

Shanghai Composite 2,816.43 , 1.27%
SSE50 2,598.49 , 1.99%
Shenzhen Composite 1,448.16 , 0.75%
CSI300 3,433.33 , 1.58%
CSI500 4,817.20 , 0.51%
Hang Seng 27,959.83 , 1.60%

Unsurprisingly, the gains have been led by large cap stocks with the SSE 50 — comprising the 50 largest listed stocks in Shanghai — soaring 2%, leaving the index at its highest level since June.

Investing.comSSE 50 4-Hour Chart.

The benchmark Shanghai Composite index, as as well as the CSI 300 which contains the 300 largest listed stocks in both Shanghai and Shenzhen, are also enjoying strong gains, lifting 1.3% and 1.6% respectively.

Stocks in Hong Kong are also coming along for the ride with the Hang Seng currently up 1.6%.

It’s a rare good day for Chinese stocks, and one that some strategists believe will be repeated following today’s announcement.

“These moves will fuel more inflows to cheap large-caps in China,” Zhang Gang, a Shanghai-based strategist at Central China Securities, told Bloomberg. “That’s why we are seeing the SSE 50 index members leading the rally.”

Brendan Ahern, chief investment officer at Krane Funds Advisors, told Bloomberg that while markets knew the consultation was coming, the increase in the weighting was larger than what many were expecting.

“It is an indication the pace of inclusion is faster than the market had anticipated,” he said.

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