Key MSCI emerging markets index rejects Chinese mainland stocks, again
Evelyn Cheng | @chengevelyn
5 Mins AgoCNBC.com
HONG KONG—It looks like the third time might be the charm for Chinese stocks.
Investor confidence is growing that Morgan Stanley Capital International will include mainland-listed stocks—known as A-shares—in its key Emerging Markets Index, tracked by roughly $1.5 trillion worth of global funds. The decision, which follows its third consultation since 2013, is due Tuesday afternoon in the U.S.
In the past, asset managers who run large global funds have expressed reservations about China’s inclusion in MSCI indexes, citing concerns about the difficulty of getting money in and out of the country and a lack of clarity over shareholders’ rights.
Yet despite some outstanding issues, investors appear ready to see shares from China—which has the world’s second-largest stock market by equity value—join the index this year.
“In general, large fund houses are in favor of inclusion,” said Cindy Chen, country head of securities and services at Citi in Hong Kong.
BlackRock Inc., MSCI’s largest customer by revenue and the world’s largest money manager, has been preparing for the inclusion of Chinese stocks for some time, according to a person familiar with the matter. In late May, the company said it had been granted the right to invest an additional 2 billion yuan ($320 million) in mainland markets under China’s Renminbi Qualified Foreign Institutional Investor program.
ENLARGE
Last month, BlackRock Chief Executive Larry Fink said the company had been meeting with authorities to increase the firm’s access to Chinese markets. “We are waiting for a day when the Chinese capital markets are open so we can bring long-term capital to China,” he said.
Inclusion in MSCI’s indexes won’t likely be a windfall for Chinese markets right away. Analysts believe about $15 billion to $30 billion could flow in over the next year. That is because Chinese stocks will only have a small 1.1% weighting in the index off the bat.
Still, passive funds that track indexes will automatically buy Chinese shares if the MSCI goes ahead with inclusion, while actively managed funds might look to increase their exposure to Chinese companies. In time, MSCI says Chinese stocks will have an 18% weighting in its Emerging Markets Index, if regulators there give more access to its markets.
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Beijing is eager to draw more long-term institutional money into the country’s highly speculative markets, which are currently dominated by retail investors. Last month, China’s market regulator rolled out changes to meet the MSCI’s concerns, including guidelines aimed at curbing companies from indefinitely suspending their shares from trading.
Some analysts believe these moves mean China’s securities regulator has done enough to merit MSCI acceptance, even though it has made some misjudged market interventions in the past year. It was forced to scrap a so-called circuit-breaker mechanism designed to stem market falls just four days after its introduction in January, for example.
ENLARGE
Goldman Sachs China strategist Kinger Lau says A-shares have a 70% chance of being included in MSCI indexes, up from 50% not long ago.
“MSCI raised five concerns in its most recent paper, and China has checked two out of five the boxes,” Mr. Lau said. “Over the years, China has made some progress, so we start from a relatively high basis.”
Still, some fund managers say China isn’t quite there yet.
“If I had a wish list, I think there are still things on the list I hope China would have done before getting added into a major index,” said Karen Wong, head of equity portfolio management at Mellon Capital Management. “I still think there’s a gap between China and the average emerging market in [their] equity market structures.”
Ms. Wong said one concern for her is whether China can handle what she expects will be a large number of funds applying for quotas to access the market should MSCI give A-shares the green light.
—Chao Deng contributed to this article.
Write to Wei Gu at wei.gu@wsj.com
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Evelyn Cheng | @chengevelyn
5 Mins AgoCNBC.com
HONG KONG—It looks like the third time might be the charm for Chinese stocks.
Investor confidence is growing that Morgan Stanley Capital International will include mainland-listed stocks—known as A-shares—in its key Emerging Markets Index, tracked by roughly $1.5 trillion worth of global funds. The decision, which follows its third consultation since 2013, is due Tuesday afternoon in the U.S.
In the past, asset managers who run large global funds have expressed reservations about China’s inclusion in MSCI indexes, citing concerns about the difficulty of getting money in and out of the country and a lack of clarity over shareholders’ rights.
Yet despite some outstanding issues, investors appear ready to see shares from China—which has the world’s second-largest stock market by equity value—join the index this year.
“In general, large fund houses are in favor of inclusion,” said Cindy Chen, country head of securities and services at Citi in Hong Kong.
BlackRock Inc., MSCI’s largest customer by revenue and the world’s largest money manager, has been preparing for the inclusion of Chinese stocks for some time, according to a person familiar with the matter. In late May, the company said it had been granted the right to invest an additional 2 billion yuan ($320 million) in mainland markets under China’s Renminbi Qualified Foreign Institutional Investor program.
Last month, BlackRock Chief Executive Larry Fink said the company had been meeting with authorities to increase the firm’s access to Chinese markets. “We are waiting for a day when the Chinese capital markets are open so we can bring long-term capital to China,” he said.
Inclusion in MSCI’s indexes won’t likely be a windfall for Chinese markets right away. Analysts believe about $15 billion to $30 billion could flow in over the next year. That is because Chinese stocks will only have a small 1.1% weighting in the index off the bat.
Still, passive funds that track indexes will automatically buy Chinese shares if the MSCI goes ahead with inclusion, while actively managed funds might look to increase their exposure to Chinese companies. In time, MSCI says Chinese stocks will have an 18% weighting in its Emerging Markets Index, if regulators there give more access to its markets.
Advertisement
Beijing is eager to draw more long-term institutional money into the country’s highly speculative markets, which are currently dominated by retail investors. Last month, China’s market regulator rolled out changes to meet the MSCI’s concerns, including guidelines aimed at curbing companies from indefinitely suspending their shares from trading.
Some analysts believe these moves mean China’s securities regulator has done enough to merit MSCI acceptance, even though it has made some misjudged market interventions in the past year. It was forced to scrap a so-called circuit-breaker mechanism designed to stem market falls just four days after its introduction in January, for example.
Goldman Sachs China strategist Kinger Lau says A-shares have a 70% chance of being included in MSCI indexes, up from 50% not long ago.
“MSCI raised five concerns in its most recent paper, and China has checked two out of five the boxes,” Mr. Lau said. “Over the years, China has made some progress, so we start from a relatively high basis.”
Still, some fund managers say China isn’t quite there yet.
“If I had a wish list, I think there are still things on the list I hope China would have done before getting added into a major index,” said Karen Wong, head of equity portfolio management at Mellon Capital Management. “I still think there’s a gap between China and the average emerging market in [their] equity market structures.”
Ms. Wong said one concern for her is whether China can handle what she expects will be a large number of funds applying for quotas to access the market should MSCI give A-shares the green light.
—Chao Deng contributed to this article.
Write to Wei Gu at wei.gu@wsj.com
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