Chinese stocks slid on Friday as USA tariffs reignited fears of a global trade war, overshadowing China A-shares' long-awaited inclusion in MSCI's benchmark market indexes which had been expected to draw a surge of foreign inflows in coming months. The changes begin on 1 June this year and it is likely to be a long process until this process is complete.
Like ZTE, China Railway Group Ltd (中國中鐵), whose H-shares are in the MSCI China Index, has been removed from the list, along with Beijing Orient Landscape & Environment Co (東方園林), China Hainan Rubber Industry Group Co (海南橡膠) and Shanxi Taigang Stainless Steel Co (太原鋼鐵). The feature has helped investors minimise counterparty risk in A-share settlement, as well as maintain compliance with asset segregation and safe keeping requirements for institutional funds.
Shanghai stocks retreated on the first day of the inclusion of A-shares into the MSCI indexes, led by falls in pharmaceutical shares and consumer sectors.
The inclusion will help China's financial market open wider to the world, with inflows of foreign investment expected, analysts said. The Index consists of stocks traded primarily on the Milan Stock Exchange. Chia says that if full inclusion of the 3,000+ A-shares companies were to happen, China could account for 42% of the index, with A-shares alone accounting for 16%. This figure may be $360bn if the full weight is allocated to the ACWI, EM and Asia Indices which both passive and active products measure against.
"On May 31, MSCI will partially include about 233 China large-cap A shares in the MSCI Emerging Markets Index".
Over the past two months, foreign investors have been ramping up investment in Chinese shares, including retailer Wangfujing Group, Shanghai Flyco Electrical Appliance and spirit maker Sichuan Swellfun, despite rising volatility triggered by fears of a Sino-US trade war. These were highlighted in 2015, when the government's attempt to influence equity markets led to extreme volatility in its stock markets.
"For example, companies must be profitable for at least three years before listing on the Main Board". The Chinese authorities then became concerned that the rise was happening too fast and they started to limit margin trading. Companies asked for trading pauses in their equities in an attempt to stop them plunging. AGF Investments Inc. now owns 1,834,482 shares of the exchange traded fund's stock worth $55,842,000 after purchasing an additional 1,382,868 shares during the last quarter.
While certainly symbolic, the question now is whether such a modest inclusion of A-shares into MSCI indices is impactful for investors. That includes ETFs such as the $49.8 billion iShares Core MSCI Emerging Markets ETF (IEMG) and the $39.3 billion iShares MSCI Emerging Markets ETF (EEM).