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

A pedestrian walks past a stock quotation board flashing the key Nikkei index of the Tokyo Stock Exchange in front of a securities company in Tokyo

Chinese investors are also awaiting a decision by U.S. index provider MSCI, which will decide today whether to include A shares in its Emerging Market Index.

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"Inclusion would be an important milestone for China's equity market and may trigger a short-term rally due to increased expectations of fresh liquidity entering the onshore market", she added. With retail investors' pessimism over the market, they are still worrying about further yuan depreciation. Since all of these funds do not passively follow the MSCI Emerging Markets Index, it is hard to estimate how many of these assets will be reallocated to Chinese A-shares once they are a part of the index.

China's fourth attempt at cracking into MSCI Inc.'s benchmark share indexes comes with its best chance of success - and the least at stake.

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

"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 global development", said Zhang Xiaojun, a spokesman for the China Securities Regulatory Commission. More broadly, China is set to be a key player in the global economy's shift in focus from West to East. Similarly, the major index providers should be keen to represent this economic reality through their indices. Hengan International Group Co. rose 4.8 percent in Hong Kong, its biggest gain in four months, after CICC upgraded the stock to "buy".

They got close a year ago, but after a couple of big stockmarket sell offs and the involvement of the Chinese government in market support measures (some would call it market manipulation and other fears about corporate governance), MSCI said no. "We have no need and no intention to change such an effective system".

Still, if MSCI again rejects inclusion, the impact on Chinese markets "could be rather limited", he said.

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. The demand for undervalued blue-chip stocks in the Shanghai Exchange pushed the market higher on June 19.

Ulrich stressed that the Chinese government has taken concrete steps to open up its equity markets to overseas investors after rolling out the Shanghai-Hong Kong Stock Connect in 2014 and Shenzhen-Hong Kong Stock Connect in 2016 as well as a bond connect program this year. Subsequently, we think the changes being considered by the major indices are exciting too.

The MSCI Emerging Markets Index has performed well so far in 2017.

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