Mainland Chinese stocks are gaining influence on global indexes. That may drive money into China

  • MSCI's announcement that it's quadrupling the weighting of Chinese yuan-denominated mainland stocks (A-shares) in its indexes is likely to drive more money into the market there, analysts and investors say.
  • The global index provider announced Thursday that it will increase the weighting of China A-shares from 5 percent to 20 percent in three steps to November of this year.
  • Gao Ting, head of China strategy at UBS Securities, said in a note that the MSCI changes would likely spur $67 billion in inflows to the A-share market this year alone.
The Shanghai stock exchange in China.
China Tourism Press | The Image Bank | Getty Images
The Shanghai stock exchange in China.

Global index provider MSCI's announcement that it will quadruple the weighting of large-cap Chinese shares in its benchmark indexes is likely to drive more money into the still highly regulated mainland market, investors and analysts said.

In a widely expected move, MSCI said Thursday that it will increase the weighting of China A-shares — yuan-denominated stocks traded on the mainland — from 5 percent to 20 percent in three steps to November of this year.

Chinese shares, which slumped sharply in 2018, have been on a tear this year, rising 14 percent in February alone on factors including optimism over progress in ending the U.S.-China trade war and expectations for the expanded MSCI inclusion.

Investors and analysts welcomed the news as a significant step in the broader opening of Chinese markets to international funds. They still remain subject to tight capital controls.

"Overall, the final inclusion plan continues to look as aggressive as its proposal, marking another milestone in China's capital market opening up," Citi China equity strategist Jerry Peng said in a note dated Thursday, adding that the U.S. bank expects "strong foreign inflows to China's onshore market."

Chinese A-shares were included in the MSCI Emerging Markets Index for the first time last year. Investors can access them through an arrangement between the Hong Kong and mainland Chinese markets.

Gao Ting, head of China strategy at UBS Securities, said in a note Friday that the MSCI changes would likely spur $67 billion in inflows to the A-share market this year alone.

'Volatile and momentum-driven'

Philip Li, senior fund manager at investment firm Value Partners in Hong Kong, said that the increased weighting — and expectations of more to come — are likely to boost investor appetites.

"When we get to 20 percent at the end of this year, would it be 50 percent, 80 percent in one or two years' time?" Li said to CNBC on Friday.

"And I think that's where people are thinking 'Okay, I have to have this exposure,'" he added.

MSCI said in announcing the changes that further increases beyond 20 percent "would require Chinese authorities to address a number of remaining market accessibility questions," which it said include "restrictions on access to hedging and derivatives instruments."

Some said, however, that the increases may have limited impact initially.

"It doesn't affect our view of whether a company is good or bad, nor do we feel any need to adjust our portfolios," Nicholas Yeo, head of China equities at Aberdeen Standard Investments, said in a Friday note.

"We take a long-term view of what has historically been a volatile and momentum-driven retail market," Yeo said.

But the trend in the increasing importance of Chinese shares ultimately can't be ignored, he said.

"As China's representation in global benchmarks grows, having little or no exposure to the market will increasingly become an active decision," he said.

Correction: This article has been updated to reflect that Jerry Peng is a China equity strategist for Citi.