Foreign flows into China stocks tepid ahead of MSCI inclusion

The inclusion of China's A shares will have a very small effect on the make up of the MSCI Emerging Market index

The Shanghai Composite Index stumbled 0.66 percent lower, or 20.33 points, to 3.075.14 and the Shenzhen Composite Index, which tracks stocks on China's second exchange, slipped 1.20 percent, or 21.22 points, to 1,746.33.

China's MSCI entry will integrate the world's second-biggest equity market, with a total stock market capitalization of more than $8 trillion, into the global financial system.

Like ZTE, China Railway Group Ltd (中國中鐵), whose H-shares are in the MSCI China Index, has been removed from the list, along with Beijing Orient Landscape & Environment Co (東方園林), China Hainan Rubber Industry Group Co (海南橡膠) and Shanxi Taigang Stainless Steel Co (太原鋼鐵).

"'The inclusion of A-shares in MSCI indices will help improve corporate governance and many other aspects of the A-share market because Chinese companies will have to bring their standards in line with those expected by worldwide investors", Shi said.

However, if China continues to liberalize its markets and MSCI greenlights further A-shares inclusion for its indices, China's weighting in the Emerging Markets Index could jump significantly.

"The [MSCI] announcement happened a year ago, which leaves more than enough time for them to increase their exposure".

"The A-share market is getting more and more aligned with the global markets". Citigroup Inc. owned about 0.07% of iShares MSCI EMU Index worth $11,003,000 as of its most recent SEC filing.

US-based MSCI has for years resisted adding China-listed stocks - or "A-shares".

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Charles Li Xiaojia, chief executive for Hong Kong Exchanges & Clearing (HKEX), which runs the city's stock exchange, said at the MSCI inclusion ceremony he expected trading volumes in the Stock Connect programme to increase sharply, adding the bourse is well prepared for such a scenario in terms of clearing and settlement arrangements.

Banque Pictet & Cie SA boosted its position in iShares MSCI Japan ETF (NYSEARCA:EWJ) by 269.1% during the 1st quarter, according to its most recent 13F filing with the Securities and Exchange Commission (SEC).

The inclusion will help China's financial market open wider to the world, with inflows of foreign investment expected, analysts said.

"Index inclusion will bring more long-term institutional investors into the A-shares market.which will change the market structure", Shi said, noting that the market is now dominated by retail investors.

Foreign investment in Chinese shares has been on the rise, but remains relatively small.

"Global institutional investors are now underweighted in Chinese assets.

However, more institutional investors may bring a rational mentality to the stock trading behaviour and global standards of corporate governance", he said.

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