Investors ride out MSCI snub to A shares

Most see more important issues as key to trading in the Chinese stock market, play down non-inclusion in index

Global investors have shrugged off MSCI Inc's decision not to include China's A shares in its benchmark index.

There are more important issues to consider when it comes to investing in the Chinese stock market, they say.

While some investors expressed disappointment after MSCI, the global index compiler, decided not to include A shares for the third year in a row, many global investors said they would look beyond the move, as its impact on the market is likely to be more symbolic than substantial.

Frank Benzimra, an equity analyst at French bank Societe Generale, says in a research note that the key problem for China equities is not that they have not been included in international indices, but rather "the real issues include rising leverage, the onshore yuan's value and the credit-fuelled growth".

Benzimra is underweight on Chinese equities as the economic data in May revealed the weakness in China's private sector investment and raised doubts about the sustainability of a state-led recovery.

This month, MSCI said regulatory and capital controls in China still remain concerns to global investors who, it says, would like to see more evidence of Beijing's efforts to align the domestic practices with international standards.

Wendy Liu, chief China strategist at Nomura Securities, says the ultimate pull of A shares is their investability.

"Global investors are on the lookout for assets that can produce positive returns. Ultimately, if listed companies can consistently deliver strong operating results and earnings growth, investors will take notice," she says. "There is a lack of willingness among offshore investors to lose money while the Chinese financial authorities learn how to execute (reforms)."

Tom Orlik, a Bloomberg economist, says in a research note that sustained increase in international investors' confidence will require consistent effort on China's thornier policy challenges.

"A stable and predictable regulatory environment, more complete set of capital market instruments and smoother arrangements for cross-border capital flows would all increase the efficiency of the markets," he adds.

Sun Jianbo, chief strategist at China Galaxy Securities Co Ltd, says MSCI's decision is mainly symbolic, and warns: "Investors should adopt a cautious approach toward A shares and pay attention to more important issues, including US interest rate policies and Britain's possible exit from the European Union."

lixiang@chinadaily.com.cn

(China Daily Africa Weekly 06/24/2016 page29)