China stocks slip ahead of MSCI decision, liquidity concerns linger

Nevertheless, the inclusion of China will mark a milestone for the credibility of Chinese A-shares and therefore may lead to further development of the Chinese domestic stock market, attracting new worldwide investors and increasing the overall liquidity of the market. “We believe this was due to foreign investors’ expectation that MSCI will announce the inclusion of A-shares this week”, said UBS strategist Gao Ting, noting that northbound investors have mostly chosen shares in the consumer and pharmaceutical sectors over the past month. Hong Kong stocks are already included, but including mainland China would increase the weighting of China stocks in the Emerging Market index from roughly 26 percent to over 40 percent with full inclusion.

“Hong Kong has been part of the global financial markets for so many years”, Chan said. “That’s what market participants want to hear, that China is opening up, that capital controls are easing and that it’s an easier place to do business”, said Sat Duhra, portfolio manager at Janus Henderson Investors. In the end of May, Moody’s Investors Service downgraded China’s credit, and the China market responded with anger and immediate rebuttal. And, while the markets wait for this week’s decision from the MSCI, it’s worth reminding ourselves what this means for pension funds and other institutional investors.

The views expressed are the views of the author, not necessarily those of Thomson Reuters. “In the case of a “No” decision: The A-share market might first react with a minor decline of 1.0 percent”, Morgan Stanley said in a recent report. Fidelity’s Tim Orchard, the chief investment officer in the Asia Pacific (ex-Japan), told the Financial Times: “As access to China’s onshore equity market widens, it is natural for these stocks to be gradually included in equity market indices”.

“This represents 0.8 percent of A-shares’ free-float market capitalization and 2.6 percent of its daily trading turnover”, he added.

However, some investors appear retreating just ahead of the MSCI announcement, exchange-traded fund (ETF) data suggests.

UBS Wealth Management earlier last week said there could be a less than 50 per cent chance for A shares to get approved this time around given the biggest remaining hurdle – the required CSRC approval for foreign institutions to launch any A-share linked derivative in overseas markets.

The FT points out that moves by MSCI have raised the possibility of a positive vote for China.

The Goldman analysts predicted the impact to be bigger in the long term, as the inclusion of A shares could encourage inflows of US$210 billion over the next five years.