MSCI considers boosting China’s index weighting, could add $66 bn of inflows

Global index provider MSCI said on Wednesday it will consider quadrupling the weighting of Chinese big-caps in its global benchmarks next year, a move that could bring in $66 billion in new foreign investment.

MSCI also proposed adding Chinese mid-caps and shares listed on Shenzhen's start-up board ChiNext, which would nearly double the number of mainland stocks in its indexes to roughly 430.

Investor expectations that more mainland stocks will be included in mainstream global benchmarks boosted Chinese share prices on Wednesday, with Shanghai and Hong Kong bourses up more than 1 per cent.

Positive development

MSCI’s consultation for a further weight increase of Chinese A-shares comes just months after their historic entry into MSCI indexes in June, which has brought in tens of billions of dollars into the market. It also comes shortly before a decision is due by rival index publisher FTSE Russell on whether China will be included in its indexes.

“Based on back-of-the-envelope calculation on the assets benchmarked against MSCI, I would say a minimum of $66 billion,” Chin Ping Chia, MSCI's Head of Research for Asia Pacific, said of broad inflow estimates for the new round of inclusion in an interview.

Chia dismissed suggestions MSCI's consultation announcement was timed to compete with FTSE's announcement and said it followed positive investor feedback after the initial index inclusions this year. He also said China's push for further financial deregulation, in the face of surging market volatility and a broadening trade war with the United States, was positive. “Despite all the headwinds, China seems to be very determined to open up its capital market to global investors,” Chia said.

MSCI, which has included about 230 Chinese big-caps in its flagship indexes with an initial inclusion factor of 5 per cent, said in a statement that it has proposed to increase that factor to 20 per cent. The proposed increase will happen in two phases coinciding with MSCI's index reviews in May and August 2019, it said.

‘Rising interest’

Alexander Treves, JP Morgan Asset Management Emerging Markets and Asia Pacific Investment Specialist, expects significantly more foreign inflows into China's A-shares over the next few years, in part because of the MSCI index inclusion. “However, we think the bigger factor may be rising interest from European and increasingly US institutional investors seeking to better understand and participate in China A-Shares investment opportunities,” Treves said in a note.

In addition, MSCI has proposed adding ChiNext shares to the list of eligible segments for inclusion starting from the May 2019 Semi-Annual Index Review. MSCI is also looking at adding Chinese mid-caps with a 20 per cent inclusion factor in one phase as part of the May 2020 Semi-Annual Index Review. Chia said the proposals would involve the addition of 168 mid-caps and 31 ChiNext companies to the indexes.

China's stock market has lost roughly 15 per cent this year, and ranks among the world's worst performers.

Chia said while the criteria for stock admission is based on market accessibility, rather than market valuation or volatility, lower valuations have certainly helped create more investment opportunities.

MSCI said on Wednesday the consultation was open to feedback from the global investment community and that it would announce its decision by February 28, 2019. Chia declined to forecast how long it would take for MSCI to give Chinese A-shares full inclusion in its global indexes, but said it intended to eventually give Chinese stocks “full weight”.

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