Global asset managers have reacted positively after index compiler MSCI took the decision to increase the weight of China A shares in its global benchmarks from 5% to 20%.
The increase will be phased in over three steps in May, August and November 2019.
“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,” the New York-based company said in a statement.
The move by MSCI could trigger billions of dollars of inflows into A shares a year after China’s shares were included for the first time.
Yannan Chenye, portfolio manager and head of China equity research at Harvest Global Investments, said combined with “other China opening-up policies, such as foreign ownership via QFII [Qualified Foreign Institutional Investor] expansion, we believe it will be a record year for potential inflows into the A share market this year.
“Up to US$100 billion (€88 billion) of foreign inflow is expected, up from $45 billion in 2018. This represents over 3.5% of the total free float market cap.”
China’s stock market has traditionally been dominated by retail investors, making it prone to volatility, but increased participation by foreign institutional investors who are long-term could bring benefits, managers note.
“As the inclusion factor continues to rise over the long term, foreign institutional investors should have a greater influence on the price of blue-chip A shares,” said Eric Moffett, portfolio manager for the Asian Opportunities Equity Fund at T. Rowe Price.
“This should be a good incentive for local companies to increase the transparency of reporting practices and to adopt strategies that more firmly consider shareholders’ interest, as companies with better corporate governance are more likely to be owned by foreign investors,” he added.
The weightings increase also reflects China’s importance as the world’s second-largest economy and its integration into global capital markets.
“The lift of the inclusion factor also bodes well with continued efforts from the government to attract long-term investment by addressing some common investor concerns through the proposed merger of QFII and RQFII [Renminbi Qualified Foreign Institutional Investor] schemes,” said Michael Wu, country executive for Greater China at Northern Trust.
©2019 funds europe
