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China’s neighbors brace for outflows from their markets after MSCI inclusion

Mainland shares are expected to enjoy a healthy bounce when they open on Wednesday morning after MSCI said overnight it will add Chinese stocks to its global benchmarks for the first time – a move that should help the capital market of the world’s second-largest economy edge towards becoming more globally integrated.The closely followed USA index said it will include 5 percent of China’s 222 large-cap stocks in its Emerging Market Index starting next year, which will reduce the weights of stocks from economies already on it, including Korea.HONG KONG (AP) – Global stock benchmark provider MSCI has made a long-awaited decision to add mainland China-listed shares to its widely followed stock indexes.Credit rating agency Moody’s Investors Service has announced that MSCI’s decision to include China A-Shares into its MSCI Emerging Markets Index is positive for inflows into Chinese equity markets.”Saudi Arabia’s addition to the MSCI Watch List is an important milestone for Tadawul, and reflects the kingdom’s significant progress in capital market reform in support of Vision 2030″, remarked Sarah Al Suhaimi, the chairperson of Tadawul.The inclusion will have an immediate effect as emerging market funds stock up on the shares, investing $17 billion to $18 billion in the stocks to rebalance their funds with the MSCI indexes, according to the index manager’s estimates.MSCI in March relaxed its criteria for inclusion by cutting the number of proposed stocks to 169 from 448 in a bid to address ongoing curbs on repatriating capital from China and investor concerns over the country’s high number of suspended stocks.According to MSCI’s roadmap on the inclusion of China’s A-shares released in April a year ago, the ultimate weighting of A-shares could reach 18.8% of the MSCI EM Index. Some 222 large-cap Chinese stocks are to be added to the former, representing a 0.73 per cent weight.”The expansion of Stock Connect has been a game changer for the market opening of China A shares”.”While China’s weighting in the MSCI Emerging Markets Index may ultimately rise to 40 per cent or so, this rise is likely to be slow”, they added.Furthermore, MSCI’s indexes seek to capture the majority of the market capitalization for the country or sector of focus.However, MSCI is making available two provisional indices, one starting today – which is the MSCI China A International Large Cap Provisional Index – and the MSCI China and MSCI Emerging Markets Provisional Indexes starting August 2017.The company has been in discussions with Chinese regulators and global investors for almost four years on whether to add yuan-denominated shares listed in Shanghai and Shenzhen to the benchmark.”MSCI is very hopeful the momentum of positive change witnessed in China over the past years will continue to accelerate”. While many investors will need this time to begin setting up front and back office systems to buy into the A-shares market, there is a long list of global and regional investors that have already taken the dip via existing access programmes such as Stock Connect and the RMB qualified foreign institutional investor (RQFII) scheme. Investors may also have to master the art of being patient in the stock market.”As the global economy shifts from West to East and China continues to progress its RMB internationalisation agenda, more worldwide investors will recognise the huge investment opportunities China offers and gradually start getting and increasing exposure to the country in their diversified portfolios”. “To MSCI, the bull runs of the emerging markets were hard to miss”.Previously, MSCI had delayed the inclusion of the Chinese stocks because of certain investment restrictions.