MSCI global indexes may get A-share market boost

Possible inclusion in key gauge could bring billions of yuan into financial securities

The rising interest from foreign investors could lift China's A-share market amid expectations that it will likely be included in the MSCI global indexes, analysts say.

The market is down by 20 percent this year.

Undervalued blue chips, particularly financial stocks, are likely to attract the most overseas capital allocation as they fit into the investment preference of foreign institutional investors, according to Tu Jun, an analyst at Shanghai Securities Co Ltd.

"Based on our estimation, financial stocks will make up 40 percent of the A shares even with their initial 5 percent weighting in the MSCI indexes, which will translate into roughly 60 billion yuan ($9.1 billion) into the financial stocks."

The complete inclusion of the A shares in the MSCI indexes will bring a total of 900 billion yuan into financial stocks, he says. "It will be positive for the valuations of financial stocks and the overall A-share market."

Wendy Liu, chief China strategist at Nomura Securities, says overseas investors are moving up the learning curve and are increasingly examining the Chinese market ahead of the index provider MSCI's decision on June 14 over the inclusion of the A shares in its benchmark index for emerging markets.

"During our recent US marketing trip, we noticed greater interest in the China equities, foreign exchange market and economic outlook from a global risk management perspective, as events in China are becoming more important in setting prices of global financial assets," she says.

Domestic and overseas brokers and banks have raised the odds of the inclusion of A shares in the MSCI index. Goldman Sachs has increased the probability to 70 percent, UBS has said the odds are 50 percent, and analysts at Huatai Securities Co say the likelihood exceeds 80 percent.

The Chinese securities regulator has further refined the trading suspension rules, which was seen as an effort to clear a major obstacle for the A shares being included in the MSCI index.

MSCI decided against the inclusion in June 2015, citing issues such as investment caps, capital mobility restrictions, limited market access and a lack of transparency.

Chinese regulators recently removed the caps on foreign investments under the qualified foreign institutional investors program, which is the main channel for them to access the A-share market. The market interpreted the move as a response to MSCI's concerns.

The regulators also simplified the procedure for foreign investors to repatriate capital out of China and further clarified foreign ownership rights.

Analysts say they are expecting an announcement soon of the upcoming launch of the Shenzhen-Hong Kong stock connect. The connect, they say, could also improve the overall accessibility of A shares for foreign institutional investors.

lixiang@chinadaily.com.cn

(China Daily Africa Weekly 06/10/2016 page29)