The Strategist

MSCI to include shares of 234 Chinese companies in the indices

05/15/2018 - 12:53

Share of stocks of the companies from the local Chinese listing "A" in the MSCI China Index will amount to 1.26%, in the MSCI Emerging Markets Index – to 0.39%, MSCI said, publishing results of the next semi-annual rebalancing of the indices.

Jamie Davies via  flickr
Jamie Davies via flickr
Currently, calculation of the MSCI China index includes only shares of Chinese companies traded on foreign exchanges.

Volume of shares of Chinese companies in both indices will double in September after the August revision of the indices, MSCI reported.

Given that only a small fraction of the more than 3,000 companies whose shares are traded on the mainland exchanges of the PRC will be included in the MSCI indices at the first stage, the impact of this factor on the market is likely to be limited.

Nevertheless, it will attract billions of dollars to the Chinese stock market, which is very important, since it has been among the weakest in this year, the Wall Street Journal reports.

Stock indexes of Shanghai Composite and Shenzhen Composite fell in 2018 by about 4% because of fears of "trade war" between China and the United States.

MSCI reported that its decision to include Chinese shares from the local listing in calculation of the indices "received broad support among international institutional investors" and was primarily a result of the PRC authorities’ efforts to improve accessibility of the Chinese market.

In recent years, the PRC authorities have presented programs for cooperation between Shanghai and Shenzhen exchanges with Hong Kong, seeking to provide global investors access to shares traded on the main exchanges.

Despite the dominance of local retail investors in the domestic stock market of China, many foreign investors purchased Chinese companies' securities for their portfolios after MSCI announced its intention to include Chinese shares from the local listing in calculation of indices in June last year, says Irmak Surenkok, a portfolio investment specialist of T. Rowe Price.

Nevertheless, the share of foreign participation in the domestic stock market of China, according to the end of March, was only about 2%. For comparison: in other markets of the region, for example, the market of Taiwan or South Korea, their share is about 40%, said Surenkok.

In his opinion, the Chinese market has a huge potential, in particular, the categories of consumer and technological sectors, as well as healthcare.

In April of this year, the net inflow of funds into shares of Chinese companies circulating in Shanghai, within the program of interconnection with the Hong Kong Stock Exchange, more than quadrupled compared with March's level to 27.5 billion yuan ($ 4.3 billion), according to financial information supplier Wind. In Shenzhen, this figure has more than tripled to 11.2 billion yuan.

The MSCI indexes are of an applied nature: many investment funds "buy" them, that is, they invest in shares included in the index structure, in proportion to the weight in it, and also develop complex structural tools based on indices. Inclusion in the MSCI index guarantees higher liquidity for companies' shares.