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China Breakthroughs: MSCI inclusion of A-shares sets stage for value-added Chinese stock exchanges

Editor: Qian Ding 丨CCTV.com

07-31-2017 17:07 BJT

By Tom McGregor, CCTV.com Panview commentator and editor

China's mainland stock exchanges in Shenzhen and Shanghai hold total market capitalization of approximately - US$8 trillion, after accounting for the Hong Kong Stock Exchange, which is connected to both.

stock exchanges in Shenzhen

China's equities markets have long been a driving force for the emerging markets, but they were not listed on the MSCI (Morgan Stanley Capital Index) Emerging Markets Index.

And that's about to change since the MSCI announced on June 20, 2017 that starting next June, 222 large to mid-cap Chinese stocks would be included for listing.

Institutional investors, such as pension funds, mutual funds, hedge funds and assets management funds are likely to pour bigger investments into China's A-shares.

Reform and opening up

"We saw this opening up taking place several years ago," New York-based Kraneshares CIO (chief investment officer) Brendan Ahern told CNBC. "It's taken some time. But the world is coming around to our point of view that China ultimately will become an asset class by itself."

"Investors will need China," Ahern added.

The MSCI is a US provider of equity, fixed income, hedge funds and stock market indexes. China's A-share will join the MSCI ACWI Index ETF (exchange traded funds) and iShares MSCI Emerging Markets.

MSCI has about $US10 trillion in active and passive assets bench-marked against it. Delays had prevented China's shares from joining years ago, but Blackrock, the world's largest asset manager, endorsed its inclusion this year.

The crucial factor appears to be China's A-shares posing less risk in the emerging markets.

Safety above risk

"MSCI's decisions shows that foreign investors prefer blue chips with good quality, stable earnings growth and comparatively low risk," said chief ETF strategist Alvin Liu, for Hong Kong-based CSOP Asset Management.

Liu added, "Following the MSCI inclusion, it will push up the value of (China's) large caps."

China A-shares are leading key industries of the domestic economy, including: healthcare, consumer staples, materials, information technology (IT), telecommunications and energy.

"The A-share index will provide better representation of the Chinese economy and diversified exposure to the current Chinese equity universe," AsiaOne quotes Mike Schaio, Invesco's CIO for Asia, as saying.

The MSCI inclusion will have a positive impact for China's stock exchanges. A Goldman Sachs report forecasts foreign investors could pour US$210bn. into Chinese shares in the next five years.

Global support for China

On the day MSCI announced China A-shares inclusion, its board issued a public statement:

"This decision has broad support from 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 (Hong Kong) Stock Connect program and the loosening by the local Chinese stock exchanges of pre-approval requirements that can restrict the creation of index-linked investments globally."

More institutional investors are shifting operations to China for research and offshore trading. Business Insider reports that Wells Fargo Asset Management, Neuberger Berman, Fidelity International and Robeco have already announced plans to open up more offices in China.

Anthony Cragg, Colorado-based senior portfolio manager at Wells Fargo Asset Management called the MSCI inclusion a "game-changer, because one year from now passive funds have to buy. They have no option."

Localizing your research

"When the markets are as big as they are in China, the big global investors have to become local investors," said Nick Hoar, head of Asia-Pacific at Neuberger Berman. "That’s how you get information. That’s how you can create an information advantage."

Neuberger Berman will move its regional headquarters from Hong Kong to Shanghai.

Dutch-based asset manager Robeco has set up a wholly-owned subsidiary in Shanghai as well. The China Team intends to focus on A-share investment research and provide consultations to Robeco portfolio managers worldwide.

NY-based Citigroup also supports a bullish outlook on China’s A-shares in a report issued by the bank:

"The removal of restrictions of entry, together with eventual inclusion of China in various global capital market indexes, will raise foreign ownership of Chinese assets, likely creating further momentum for market broadening and deepening."

Eyeing a brighter future

China's economy has witnessed rapid development and surging growth rates in the past few decades, but the nation may no longer experience double-digit GDP (gross domestic product) annual growth rates.

Accordingly, Beijing is encouraging its citizens to boost consumer spending and to diversify investments, such as shifting away from real estate purchases and to place more money in China’s stock exchanges.

But, the Chinese need better education on how to make sound financial investments, while foreign investors can convey more confidence in China's stock markets by buying into China A-shares.

Its MSCI inclusion is the right step to demonstrate to global investors that they will make bigger and bolder trades on China's publicly-owned companies and would inspire more Chinese to do so as well.

Tmcgregorchina@yahoo.com

 

 ( The opinions expressed here do not necessarily reflect the opinions of Panview or CCTV.com. )

  

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