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China's stock profile to grow as A-shares make MSCI debut

Dan Martin
China's stock profile to grow as A-shares make MSCI debut

More than 200 Chinese companies debuted Friday in MSCI equity indices in what analysts call a small yet significant step in China's cautious drive to integrate with world markets and tame the volatile "casino" atmosphere of its stock exchanges.

Global equities index compiler MSCI for the first time added around 230 big-cap Chinese shares to its benchmark Emerging Markets Index and other indices used by foreign institutional investors (FIIs) to determine which shares around the world to buy.

The step is expected to lead to billions of dollars of new foreign investment in the Chinese shares by global funds that match their portfolios with MSCI indices.

But China's equities markets and corporate sector remain immature and prone to scandal. Weak corporate governance, hidden debt, and transparency levels fall far short of Western standards, and MSCI is not jumping in with both feet.

The weighting of mainland China-listed shares, or so-called "A-shares", in the Emerging Markets Index, for example, was expected to reach only an initial 0.39 percent, a tiny fraction.

As such, the prospect of a future influx of foreign funds failed to excite investors Friday, with several of the biggest companies on the list faltering by midday as renewed fears of a global trade war gripped markets.

They include heavyweights like Kweichow Moutai, the world's largest distiller, automaker SAIC and consumer appliance giant Midea.

"In the future, we will see more funds pour in, but not initially," said Jackson Wong, securities analyst with Huarong International Securities.

Wong said that despite MSCI's imprimatur, foreign investors remain cautious over China's volatile equities, where government meddling and the irrational decisions of millions of individual retail punters often trump fundamentals.

- Wait-and-see -

"The upside is limited. A lot of people are playing the wait-and-see game and they are in no rush to get into A-shares right away," said Wong.

But MSCI says China's weighting could dramatically rise in years to come if increased global scrutiny brought by Friday's move leads to hoped-for structural and governance changes in China Inc.

China-related shares already comprise a significant chunk of MSCI's Emerging Markets Index thanks to big Chinese stocks like Alibaba and Tencent, which list shares overseas.

"The A-shares market is one of the biggest in the world, with more than 3,000 stocks traded. If full inclusion were to happen, China equities could comprise 42 percent of the MSCI Emerging Markets Index, with A-shares alone accounting for about 16 percent," MSCI's head of Asia research Chin Ping Chia said in a blog post.

Fearful of destabilisation from full global integration, China has shielded its financial markets even as it became a trading superpower.

But MSCI inclusion is just one of several recent liberalisation milestones.

Since 2014 foreign investors have been able to buy Chinese-listed shares via trading conduits linking Hong Kong's exchange with China's $7.4-trillion equities market. A future link-up with the London exchange has also been proposed.

China opened foreign access to its huge bonds market last year, and this year eased restrictions on foreign ownership of Chinese financial institutions, along with other opening-up steps taken amid a trade dispute with the US.

Martin Wheatley, an adviser to hedge fund Oasis Management, said the greater stake that institutional investors will have in China from MSCI inclusion will likely encourage more liberalisation and less reliance on emotional retail traders.

"It's less about integration than about maturity within China," Wheatley told Bloomberg Television.

"What you actually need is an institutional (investor) base within China, not just external to China, that values stocks and puts the sort of pressure on companies that you see elsewhere."