Chinese stock markets received a huge boost last week following the call by index provider MSCI to up its China A shares inclusion factor from the current 5 per cent to 20 per cent by the end of this year.
The MSCI move could see up to US$125 billion flow into Chinese shares as funds tracking the index fall into line.
In a note, Canadian broking firm TD Securities says: “MSCI is tracked by around $1.9tn of funds and the increased weighting is estimated to add around $125bn of inflows into China A shares this year.”
The MSCI index-inspired Chinese capital injection could be more than matched by perhaps a further US$200 billion after Bloomberg Barclays adds China to its fixed income global aggregate benchmark this April, the note says.
“Such inflows will be welcomed given the deterioration in China’s current account position, which could even fall into deficit this year,” TD Securities says.
MSCI first included a limited number China A stocks in its broader equities indices last year with a promise to raise the allocation (which initially represented about 0.73 per cent of the emerging market index) over time.
“On completion of this three-step implementation, there will be 253 Large and 168 Mid Cap China A shares, including 27 ChiNext shares, on a pro forma basis in the MSCI Emerging Markets Index, representing a weight of 3.3% in the pro forma index,” MSCI says in a statement.
The index provider plans to raise its China A shares inclusion factor via three 5 per cent increments in May, August and November, the release says.
Consultation on the proposal to lift Chinese equities exposure to the index “garnered overwhelming support” from institutional investors, MSCI says.
“As part of this consultation, international institutional investors also stressed that a future weight increase of China A shares in the MSCI Indexes beyond 20% would require Chinese authorities to address a number of remaining market accessibility questions,” the statement says.
Among the outstanding concerns, MSCI says investors want Chinese authorities to permit listing of index futures and other derivatives on both local and global exchanges to meet “growing needs for further risk management tools”. As well, the statement says China should lift its game on settlement, trading holidays and “omnibus account structures” to increase index weightings.
Remy Briand, MSCI managing director, says in the release: “The strong commitment by the Chinese regulators to continue to improve market accessibility, evidenced by, among other things, the significant reduction in trading suspensions in recent months, is another critical factor that has won the support of international institutional investors.”