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

Jing Ulrich, vice-chairwoman of Asia Pacific at JPMorgan Chase& Co.

Global equity index provider MSCI Inc mentioned in March that it will focus on a smaller number of A-share companies, raising expectations that A-shares could finally be included in the worldwide benchmark index this year.

One can buy stocks of American companies doing a lot of business in China (think Yum Brands & its KFC business), or buy shares of Chinese companies trading on USA stock exchanges (and thus, subject to American security laws and regulations). But it would signify a further inclusion of China into the global investment market. The demand for undervalued blue-chip stocks in the Shanghai Exchange pushed the market higher on June 19. The restrictions and rules proposed by MSCI complement this by limiting the investment universe to the highest-quality and most liquid shares, which many see as an acceptable compromise. Both major index providers, FTSE Russell and MSCI, have over the last three years spent a tremendous amount of time discussing with beneficial owners, regulators, stock exchanges, and the market in general on whether China should be added to emerging market indices. Hong Kong's role as a global financial hub is seen as less consequential to China amid the boom of the world's second-largest economy.Today, China's gross domestic product is about 30 times bigger than the former British colony.The city won't be marginalised even when China's capital account is fully open, HKMA's Chan said.

Zhang Xiaojun, a spokesman for the China Securities Regulatory Commission.

Zhang has welcomed the prospects of the MSCI including A-shares in its benchmark index.

"With $1.6 trillion worth of assets under management in the MSCI Emerging Market Index, the 0.5 percent weight will bring only $8 billion of inflows to A-shares", said Aidan Yao, senior emerging Asia economist at AXA Investment Managers.

"This would potentially increase the liquidity levels and introduce comparatively stable flows into the market", she said. "Overall, it would be a positive development for the smooth functioning of the market".

Expectations of fewer new listings also supported the market.

If MSCI which overseas a family of regional and global stock and bond market indexes, approves the inclusion of a group of Shanghai and Shenzhen-listed A-Shares into its main emerging markets index, it will force funds all over the world to pour billions into the country's stocks.

While it may be the best chance so far for China to get the nod, many analysts anticipate the real impact will be minor as the resulting capital inflows will be limited in the short term.

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