China Stocks Enter MSCI as $6.9 Trillion Market Goes Global

[Ryan]

China Stocks Enter MSCI as $6.9 Trillion Market Goes Global
By
Sam Mamudi
and
Ben Bartenstein
June 20, 2017, 4:47 PM EDT June 20, 2017, 5:49 PM EDT

• Index compiler gives the nod after three years of rejection
• China has opened further to foreigners with Shenzhen link

China’s domestic equities will join MSCI Inc.’s benchmark indexes after three failed attempts, a landmark step in the nation’s integration with the global financial system.

The decision, announced by the New York-based index compiler on Tuesday, will give China’s $6.9 trillion stock market a bigger role in everything from exchange-traded funds to 401(k) retirement plans. It also advances President Xi Jinping’s ambitions to make the yuan a global currency.

While locally-traded Chinese shares will initially comprise just 0.7 percent of MSCI’s global emerging-markets gauge, the weighting could increase over time if the country enacts further reforms. The inclusion will be done in two steps: the first in May 2018 and the second in August of next year. Also Tuesday, MSCI put off decisions on whether to reclassify Argentina as an emerging market and to demote Nigeria to standalone status. It listed Saudi Arabia on its watch list for potential classification as an emerging market.

Follow our TOPLive blog on MSCI’s Annual Market Classification Review

“International investors have embraced the positive changes in the accessibility of the China A shares market over the last few years and now all conditions are set for MSCI to proceed with the first step of the inclusion,” Remy Briand, the managing director and chairman of the MSCI Index Policy Committee, said in a statement.

The development punctuates an extraordinary period during which China has sought to enter the mainstream of international finance while still maintaining a semblance of control over its markets. Since MSCI first considered adding Chinese shares to its indexes in 2014, the market has experienced an epic boom and bust, a bout of heavy-handed government intervention and -- more encouragingly for foreign investors -- a steady stream of initiatives to connect local exchanges to the outside world.

The MSCI inclusion "will provide a modest boost to sentiment and flows into China," said David Loevinger, a former China specialist at the U.S. Treasury who is now an analyst at fund manager TCW Group Inc. in Los Angeles. "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."

Read more: A QuickTake explainer on China’s complicated relationship with markets

MSCI, which has been working directly with China’s securities regulator to resolve hurdles to inclusion since at least 2015, helped bridge the gap between Beijing and reluctant global asset managers with a less ambitious proposal unveiled in March. It cut the number of eligible Chinese stocks by about half and said shares halted for more than 50 days in the past 12 months wouldn’t be eligible. All companies included in the March proposal were large-cap shares accessible to foreigners through China’s cross-border exchange links with Hong Kong.

International money managers can now buy and sell more than 1,400 domestic Chinese stocks after authorities opened the Shenzhen Connect in December, about six months after last year’s MSCI rejection. The first link with Shanghai started in late 2014.

Inclusion in MSCI indexes will spur about $8 billion to $10 billion more in fund flows to China’s A shares, according to Lucy Qiu, an analyst at UBS Wealth Management’s Chief Investment Office, which oversees strategy for $2.2 trillion in assets.

"Over the long term, assuming further liberalization 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," said Nick Beecroft, an Asian equity portfolio specialist at T. Rowe Price.

Given their tiny initial weighting, domestic Chinese shares will be dwarfed by the nation’s overseas-traded stocks. The country already has the largest position in the MSCI Emerging Markets Index, thanks to Hong Kong-listed companies like Bank of China Ltd. that joined the gauge years ago. The country’s dominance has only increased recently with the addition of U.S.-traded firms including Alibaba Group Holding Ltd.

In 2017, internationally-listed Chinese stocks have proven a better bet than their local counterparts. The MSCI China Index has advanced 25 percent, trouncing a 1.2 percent gain in the Shanghai Composite Index.

China’s offshore yuan was little changed at 6.8237 per dollar on Tuesday.

Argentina, Saudi
While China celebrated, Argentina bulls were in shock as the index compiler defied predictions to upgrade the country to emerging market status, keeping it in its frontier group for at least another year.

MSCI is delaying a decision on reclassifying the nation after having the country in review for a year. President Mauricio Macri lifted capital controls since taking office in December 2015, but MSCI wanted to wait.

"Although the Argentine equity market meets most of the accessibility criteria for emerging markets, the irreversibility of the relatively recent changes still remains to be assessed," MSCI wrote in a statement.

Saudi Arabia got better news, passing a major barrier to being classified by next year as an emerging market, an upgrade that may draw billions of dollars to its traded companies.

The kingdom, already boasting the Middle East’s largest equities market, was added to MSCI’s watch list for a potential upgrade in 2018, the index provider said, citing “major enhancements to the accessibility” of its markets.

A decision to move Nigeria from frontier status to standalone was delayed to November. MSCI said investors “seem to be cautiously optimistic” about a new foreign-exchange trading window begun by the central bank for investors and exporters. Restrictions on currency trading in 2015 prompted the review.

For many investors, China’s local shares represent the future. Not only is the market massive -- the second-biggest worldwide after America’s -- it’s also home to many of the companies most aligned with China’s consumer and service industries, which are seen as key drivers of the $11 trillion economy’s long-term expansion. And while the yuan has been under pressure recently, so-called A shares in Shanghai and Shenzhen give global investors exposure to a currency that’s likely to play a growing role as China expands its economic clout overseas.

Read more: A QuickTake on China’s efforts to spread its influence

"This is the start of a process through which Chinese equities will achieve a prominence in global investors’ portfolios that reflects the size and significance of China’s domestic stock market and its economy," Helen Wong, HSBC’s Chief Executive of Greater China, said in a statement.

https://www.bloomberg.com/news/arti...msci-entry-as-6-9-trillion-market-goes-global

 

[Ryan]

Next step on China’s markets road

China’s stockmarket has a capitalisation of $US8 trillion. Picture: Bloomberg

• The Australian
• 12:00AM June 21, 2017
• GLENDA KORPORAAL
• 
  Associate Editor (Business)
  Sydney
  @GlendaKorporaal
  
  

It’s one of those small steps forward that could have big implications for world financial markets.

Stockmarkets in Asia are bracing themselves for a decision this morning on whether US-based index giant MSCI will include China A shares — the shares traded in mainland China — in its emerging market index.

If it happens, it has the potential to see a big flow of funds into the two Chinese stockmarkets (Shanghai and Shenzhen), which collectively comprise the world’s second-largest stockmarket by market capitalisation and trading value.

It will also become another important step in the evolution of the Chinese sharemarket and the integration of Chinese financial markets with the rest of the world.

The shares of Chinese companies already have the biggest weighting in the MSCI Emerging Markets Index, which is tracked by funds around the world and holds an estimated $US1.5 trillion ($2 trillion) in assets. But these are the shares of Chinese companies traded outside of China in various offshore forms, including H shares and “red chips”.

The domestic Chinese sharemarket has long had a reputation with foreign investors as a Wild West (or Wild East) market with high volatility and poor levels of corporate governance.

Until recently, it was closed to all but a few major foreign institutional investors, such as Australia’s AMP.

But, step by step, things are changing. And the Chinese sharemarket, like the nation’s broader economy and currency market, is gradually opening up and moving — sometimes in almost jagged movements — towards global standards.

If the global index giant decides that China A shares can be included in its index of “investable” emerging market shares, it will mean billions of dollars worth of investment funds will flow into the designated stocks in the index — a select list of Chinese blue chip companies now traded on the Shanghai and Shenzhen exchanges.

UBS analysts are predicting it could potentially trigger inflows of $US8 billion-$US10bn into Chinese shares in the short term from global investors who benchmark themselves on the index.

But UBS’s head of China equities, Tommie Fang, says the real impact of the move would be on the long-term globalisation of the Chinese sharemarket.

He argues that the inclusion of China A shares in the index would be as significant as China’s historic accession to the World Trade Organisation in 2001.

“In the decade since joining that organisation, China witnessed lightning growth in its economy through foreign direct investments as well as greater sophistication in domestic industries that came with foreign participation,” he wrote in a recent paper on the subject. “Similarly, the inclusion of China A shares would also bring more foreign institutional investors into the capital market, together with the advances they would lend.

“We think this milestone would be a tipping point in changing the dynamics and demographics of the (Chinese) capital market, accelerating the road towards internationalisation.”

In short, just as foreign direct investors into China helped push up sectors of the real economy to world-class standards, so would the big opening up of China A shares to foreign investors see these companies forced to become globally competitive in terms of governance, financial accounts and Chinese regulators adopting more global approaches.

Foreign fund managers can already invest in China A shares in a limited way.

The Chinese first allowed qualified foreign institutional investors to buy a limited amount of domestically traded shares.

The next step was the launch of a “connect” in November 2014, which allowed investors in Hong Kong to buy a select group of shares on the Shanghai Stock Exchange, subject to various restrictions.

A similar “connect” between Hong Kong and the much smaller Shenzhen Stock Exchange was launched in December last year. Offshore investors can now buy 1480 Chinese shares listed on either exchange through these connect schemes.

If it went ahead, the move by MSCI would mean another big step forward, effectively giving the shares an endorsement that they are “investable” shares worthy of consideration by conservative global institutional investors. The shares included by MSCI would come from the list of Chinese shares already approved for the “connect” schemes.

It would shift the balance of decision-making from some adventurous offshore investors able to buy some shares traded in mainland China, to a ruling by a respected index company that the Chinese shares listed were OK to be considered by global investors.

Many big foreign institutional investors are now becoming more adventurous about investing directly into Chinese shares through the connect scheme, while the Chinese government is also slowly moving towards global standards.

For the big global investors, the Chinese sharemarket is emerging as a serious new frontier — its sheer size is forcing them to take its potential seriously.

The Chinese stockmarket has a market capitalisation of some $US8 trillion with a daily turnover of about $US70bn this year.

Giant US-based fund manager BlackRock, which has a $US32bn emerging market ETF, has already said it wants MSCI to go ahead with the move. And US index fund giant Vanguard opened an office in Shanghai earlier this year.

UBS’s Fang says the inclusion of Chinese traded shares on the MSCI Index would have a “profound effect” on China’s capital market both globally and locally.

This is the fourth straight year in a row that MSCI has considered the move. So far it has baulked at the decision. The sticking point has been the limitations, controls and other actions taken by Chinese authorities on trading in the shares (including their eager moves to suspend trading).

UBS strategist Gao Ting and other analysts say the probability of the A-share inclusion has increased this year. The view is still that today’s decision is far from a done deal — but over time there is little doubt it will happen.

In a recent article, Forbes contributor Kenneth Rapoza says the chances of a “yes” decision today were “somewhere between zero per cent and 75 per cent depending on who you ask”. But he goes on to say “that it is going to happen ‘one of these days’ is a given”. He argues that foreign investors who want to get in ahead of the rest of the world should look at buying Chinese shares now, as global investors are going to get into the market in a serious way sooner or later.

Even if MSCI makes a “no” decision again today, there are other steps on the horizon: the potential end of the daily quotas on shares traded via the Hong Kong “connect” schemes with the two Chinese exchanges. There is also potential for a bond market “connect” between Hong Kong and China within the next 12 months.

Today’s decision follows last year’s move by the International Monetary Fund to include the Chinese currency in its official “basket” of globally traded currencies. The yuan now ranks alongside the US dollar, euro, yen and British sterling in the IMF’s eyes. The move was the first time a new currency was included in the IMF basket since the euro in 1999.

There is a Chinese saying about crossing the river by feeling the stones. Sometimes it is hard for outsiders to appreciate what is going on. Today’s decision by MSCI will be another stepping stone towards the globalisation of the Chinese economy.

http://www.theaustralian.com.au/business/opinion/next-step-on-chinas-markets-road/news-story

China gains entry to MSCI’s $1.6tn global index
Decision marks a milestone in Beijing’s efforts to attract foreign funds
Argentina left out of MSCI emerging market upgrade
NEW 43 MINUTES AGO
© FT montage; Reuters
Jennifer Hughes in Hong Kong and Nicole Bullock in New York

Chinese stocks have gained direct entry to MSCI’s global benchmark equity index for the first time, marking a milestone in Beijing’s efforts to draw international funds into the world’s second-largest market.

The move means mainland equities, known as A-shares, will next year be included in MSCI’s flagship emerging markets index, obliging the estimated $1.6tn of investment funds that track the index to buy the stocks.

The index provider’s decision opens a new front in investors’ long-running debate over whether, and how, to introduce domestic Chinese securities into international portfolios.


“International investors have embraced the positive changes in the accessibility of the China A-shares market over the past few years,” said Remy Briand, MSCI managing director and chairman of the MSCI index policy committee.

The company said its decision had “broad support” from international institutional investors mostly thanks to the improved accessibility to the China A-shares market from the Stock Connect programme that links Hong Kong with Shanghai and Shenzhen. There are also now looser preapproval requirements at local Chinese stock exchanges that can restrict the creation of index-linked investment vehicles.

The Stock Connect operates as a closed system where international investors buy A-shares in Hong Kong dollars and also cash out in that currency, meaning they are subject to fewer capital restrictions than if they bought the shares in the mainland using renminbi.

MSCI plans to add 222 China A large-cap stocks, which will mean they account for 0.73 per cent of the weight of the MSCI emerging markets index. That is a larger number of stocks and a higher percentage than the index provider had proposed. The inclusion will occur in two steps, in May and August next year.

China’s domestic equity and bond markets are the second- and third-largest in the world, respectively, yet foreigners hold just roughly 2 per cent of each. Three previous proposals by MSCI to include mainland stocks were rebuffed by the index provider’s stakeholders — mostly large asset managers.

“MSCI index inclusion of China A-shares will cause an investor paradigm shift whereby thousands of investors around the globe would potentially invest billions in mainland China,” said Michael Underhill, chief investment officer at US-based Capital Innovations.

Investors’ wariness had centred on China’s weak corporate governance, concerns over how it polices its stock markets and the difficulties money managers face when repatriating funds on demand. Anxiety about the latter was amplified by Beijing’s heavy-handed response to the 2015 market crash, where at one point, more than half of all stocks were suspended from trading and officials forced local institutions to contribute to a bailout fund.

Even as it gave the green light to China A-shares, MSCI said investors encouraged Chinese authorities and exchanges to consider additional measures to address suspensions.

MSCI also signalled that further expansion of Chinese stocks in its indices was possible.

“When further alignment with international market accessibility standards occurs, sustained accessibility is proven within Stock Connect and international institutional investors gain further experience in the market, MSCI will reflect a higher representation of China A-shares in the MSCI emerging markets index,” Mr Briand said. “MSCI is very hopeful that the momentum of positive change witnessed in China over the past years will continue to accelerate.”

MSCI said it increased the number of China A shares to 222 from 169 after investors recommended that the index provider include shares of companies that already have H shares equivalents — the Hong Kong shares of mainland companies — in the MSCI China index.

Global index providers have long danced around the issue of including domestic Chinese securities in their flagship products. Until MSCI’s decision, the farthest any had gone was providing a so-called “parallel universe” system — introduced by FTSE and by Bloomberg — where followers had the choice of a benchmark that added mainland assets or one that maintained the status quo and excluded them.

China-related stocks already make up 27 per cent of MSCI’s emerging markets index but this largely consists of shares listed in Hong Kong and the US such as Chinese tech giants Tencent and Alibaba.

The decision to go ahead this year was considered more likely after the inclusion of A-shares won support from key investors including BlackRock, the world’s largest asset manager, which said in April for the first time that it backed the idea.

In a simultaneous decision, MSCI said Argentina will not be reclassified to emerging market status, upholding a 2009 decision to downgrade the country to a frontier market after a previous government applied foreign exchange controls.

For Argentina, market friendly policies since the administration led by Mauricio Macri was elected 18 months ago — including the issuance of a record breaking $16bn sovereign bond, its first in more than a decade after a long-running and bitter legal dispute between creditors and the state — were not enough to pay the way for the switch.

MSCI said that investors wanted to see the changes in place for a longer period of time “to be deemed irreversible”. Argentina remains on review for next year.

MSCI also said that it will include Saudi Arabia in its 2018 classification review for potential inclusion in the MSCI emerging markets index.

https://www.ft.com/content/f648b8f6-550f-11e7-80b6-9bfa4c1f83d2