Trader Talk

Traders brace for MSCI decision on China

Pisani's market open: Chinese market back again

China mainland shares have resumed their rally, with the Shenzhen closing up 4.8 percent and the up 4.7 percent, after a wild prior week that saw both indices drop.

Still, the whole world has been watching one of the great runs of the century in China's domestic market this year.

China domestic stock market (YTD)

  • Shanghai: up 49 percent
  • Shenzhen: up 107 percent

Some of this is due to the continued stimulus from the Chinese government, some of it due to more trading using the Shanghai-Hong Kong link, and some may have been in anticipation of a decision that is looming from MSCI, the world's biggest indexer.

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On June 9, MSCI will announce whether mainland China shares will be included in its Emerging Markets Index, which is the index used for the largest Emerging Market ETF.

If that happens, it could change the dynamic of global investing. A lot of western money managers will be buying mainland Chinese shares.

The argument for including mainland China is a fairly simple one: it is underweighted in global indices. Consider the following breakdown of the weighting of some of the biggest countries in the world in the MSCI All Countries World Index, which represents the broadest exposure to international developed and emerging market companies and is composed of roughly 1,300 stocks.

MSCI All Countries World Index (weighting)

  • United States: 50 percent
  • Japan: 8 percent
  • UK: 6 percent
  • Germany: 3 percent
  • China: 3 percent

Note the disparity. The United States has 50 percent of the weighting, and China has only 3 percent, despite the fact that China is roughly 15 percent of global GDP.

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The Chinese have complained that this is not a fair distribution, and they do have a point.

Including mainland China shares in the Emerging Market Index—Hong Kong listed companies are already included—would be a start.

The betting is that this is still somewhat of a long shot, but there is no doubt that China is pushing aggressively to have its mainland shares included in the global markets.