SYDNEY — After three failed attempts, Chinese mainland-traded stocks have finally been admitted to the MSCI’s Emerging Market Index, a significant step in further opening Chinese financial markets to the global investment community.
In a statement on Wednesday, the MSCI said it planned to add 222 China A Large Cap stocks beginning next year, representing approximately 0.73% of the weight of its Emerging Markets Index.
“This decision has broad support from international institutional investors with whom MSCI consulted, primarily as a result of the positive impact on the accessibility of the China A market of both the Stock Connect program and the loosening by the local Chinese stock exchanges of pre-approval requirements that can restrict the creation of index-linked investment vehicles globally,” the MSCI said.
The group said the admission to the index would be in two stages, beginning in May next year.
It added China’s weighting in the index could increase further should local regulators continue with market reforms.
“Further inclusion will be subject to a greater alignment of the China A shares market with international market accessibility standards, the resilience of Stock Connect, the relaxation of daily trading limits, continued progress on trading suspensions, and further loosening of restrictions on the creation of index-linked investment vehicles,” it said.
“MSCI will continue to monitor the situation and launch a public consultation to solicit feedback from investors once warranted.”
The MSCI Emerging Markets Index currently includes 830 stocks from 23 Emerging Markets, including global heavyweights such as Samsung, Tencent and Alibaba, along with several large Chinese banks.
A-shares, as they are known, are stocks traded in mainland China, and currently have a market capitalisation of $US6.9 trillion.
Offshore traded Chinese stocks, predominantly listed in Hong Kong, are already the largest component in the MSCI’s Emerging Market Index, accounting for 27.66% of its market weighting.
While the initial weighting of onshore-traded stocks will be significantly lower than their offshore-traded counterparts, the admission to the index could mark a significant turning point in opening up China’s financial markets to the world.
“Over the long term, assuming further liberalisation and regulatory reform of the mainland stock markets, the depth of China’s A-share market could mean China gains substantial weight within those broader indices,” Nick Beecroft, an Asian equity portfolio specialist at T. Rowe Price, told Bloomberg.
Others, such as David Loevinger, an analyst at fund manager TCW Group, suggest the small initial weighting could act as a catalyst to spur on further market reforms within China.
“More importantly it strengthens Chinese reformers that want to open China’s markets. The small index weight looks like a compromise between those asset managers that wanted China in and out,” he told Bloomberg.
Loevinger suggests that the decision today “will provide a modest boost to sentiment and flows into China”.
There’s likely to be plenty of eyes on Chinese stocks when they resume trade at 11.30am AEST.
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