US$500 billion worth of questions after China’s MSCI inclusion
Investors will now have to come to terms with Chinese markets
Amid persistent investor wariness of China’s equities markets, driven by concerns regarding speculative investing habits and macro uncertainty as China restructures its economy, it just became impossible to ignore China’s US$7 trillion worth of stocks.
US$1.6 trillion in global funds are estimated to follow MSCI’s emerging markets index, as the Financial Times reports, and starting next year they will have to contend with how to weight 222 Chinese A-shares.
“Investors who are zero-weighted towards the mainland are now going to have to answer the question: why are you zero-weighted when A-shares make up 0.73 per cent of your benchmark?”, Rakesh Patel was quoted as saying.
It doesn’t stop at the modest inclusion that those stocks will represent. The move likely foreshadows greater inclusion moving forward, with HSBC projecting that if MSCI and rival FTSE decide eventually to fully include Chinese stocks, it would push US$500 billion into Chinese stocks over the next five to ten years.
It will be quite an adjustment for fund managers who will have to navigate an unfamiliar corporate governance landscape as well. James Kynge writes today for the FT that a crucial feature relied on for stock market governance is missing in China. While investors should theoretically exert influence over a board of directors, who serve the interest of investors, with China’s state-owned companies it is the opposite. Leadership is appointed by the state, with investor engagement held to a minimum.