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

China’s securities regulator vowed last week to stick to capital market reforms regardless of whether the country’s A-shares are included in the MSCI Emerging Market Index.

Expectations of fewer new listings also supported the market.

The index on which the iShares MSCI Emerging Markets exchange-traded fund (EEM) is poised for some tinkering, but it is technical factors that may spell a pause for the ETF, one observer says.

Since the decision not to include A-shares a year ago, Chinese regulators have been working hard to improve foreign investors’ accessibility as well as taking action to prevent dramatic market sell-offs, as witnessed in 2015.

“With or without the inclusion, China’s stock market, and our capital market as a whole, will not alter its direction of reform toward market-oriented, law-governed and worldwide development”, said Zhang Xiaojun, a spokesman for the China Securities Regulatory Commission. The question was clear: have the Chinese authorities made enough progress on making Chinese equities accessible and investable for worldwide investors?

Asian shares were mixed Tuesday as investors awaited news from index provider MSCI on whether Chinese shares will be included in its Emerging Markets Index- at the fourth attempt.

More importantly, if MSCI rejects China’s inclusion again, that could likely provoke speculative buying by red-faced market players in China.

China will be glad to see it happen, if MSCI decides to include A shares”. It can therefore be a first step in accessing China’s onshore equity market in a reassuring and controlled manner, before moving on to bigger and better things.

“Hong Kong has been part of the global financial markets for so many years”, Chan said.

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

China Evergrande Group jumped 7.8 percent in Hong Kong as government data showed new-home prices rising in 56 of 70 Chinese cities in May.

However, we found subtle changes in the market sentiment lately.

The trading link provides a low-priced conduit for RQFIIs, including ETFs, to gain direct access to A-shares, as it does not require a license or quota.

While mainland equities have been losing value, the nation’s stocks traded offshore have surged toward two-year highs, led by technology firms.

“While the stock connect programs will provide worldwide investors direct access to most companies traded in the Chinese mainland, the bond connect program can enhance the liquidity and pricing efficiency of Chinese bonds in the market”, said Ulrich. Subsequently, we think the changes being considered by the major indices are exciting too.

The current MSCI EM index can be turned into an “MSCI EM ex-China index”, similar with those Asia ex-Japan indices in the markets.