Foreign investors bet billions on China blue-chips joining MSCI index

Shenzhen Stock Exchange

"With or without the inclusion, China's stock market, and our capital market as a whole, will not alter its direction of reform toward market-oriented, law-governed and global development", said Zhang Xiaojun, a spokesman for the China Securities Regulatory Commission.

That said, market participants expect the new weighting of Chinese A-shares in the MSCI Emerging Markets Index will be far below 1%, which means the amount of money flowing into Chinese equities because of its inclusion in the MSCI Emerging Markets Index will be much lower than the amount stated above.

The top Chinese securities regulator is cracking down on illegal stock market activity, handing out more fines over the first five month of the year than in all of 2016.

The current MSCI EM index can be turned into an "MSCI EM ex-China index", similar with those Asia ex-Japan indices in the markets.

The ETF closed up 1% Monday at $41.63, and the Vanguard FTSE Emerging Markets ETF (VWO) rose 0.7%, while the iShares China Large-Cap ETF (FXI) was up 1.4% and the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) was up 0.9%.

According to the Financial Times China's $US7 trillion A-share markets and its $US9.3 trillion domestic bond market (the world's second and third largest respectively) are off limits to most foreign investors "because governance problems dissuade index providers from including them in their benchmarks". It is a far smaller slice of the stock investment universe - about 10 percent.

Total turnover of stocks in the two indices shrank by 3.4 percent to 351 billion yuan (51.6 billion US dollars) from the previous trading day. "Not to mention that the inflows will take place in a slow process".

"Inclusion would be an important milestone for China's equity market and may trigger a short-term rally due to increased expectations of fresh liquidity entering the onshore market", she added.

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The views expressed are the views of the author, not necessarily those of Thomson Reuters. MSCI's decision is expected Tuesday after the close of USA markets.

The MSCI is set to decide on 20 June whether to include A-shares in the EM index for the first time, after choosing to put off the move past year.

If MSCI says "No", A shares may react with a 1 per cent decline, which is still "minor", the analysts said.

China's fourth attempt at cracking into MSCI Inc.'s benchmark share indexes comes with its best chance of success - and the least at stake.

The index on which the iShares MSCI Emerging Markets exchange-traded fund (EEM) is poised for some tinkering, but it is technical factors that may spell a pause for the ETF, one observer says.

On the other side, a few investment institutions hold more conservative views on the probability of MSCI's acceptance.

"The inclusion could bring about 60.7 billion yuan into the (A-share) market, but the impact would be limited if the inclusion does not happen", Haitong Securities wrote.

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