The weight of Chinese A shares in MSCI’s global indices is set to rise, creating a major long-term opportunity for foreign investors. The move comes amid further reform in China and steps to open up its capital markets.
Global index provider MSCI is set to quadruple the inclusion factor for China A-shares from 5% to 20% in three steps:
Source: BNP Paribas Asset Management, MSCI, data as of 22 January 2019
The latest MSCI decision has received overwhelming support from international institutional investors. The successful implementation of the initial 5% inclusion boosted investor confidence. Investors recently welcomed the following commitments by the Chinese authorities:
Source: MSCI, BNP Paribas Asset Management, data as of 1 March 2019. IF: inclusion factor. Full inclusion weightings are estimates.
Source: UBS, Wind, PBoC, SAFE, CSRC, data as of 1 March 2019
In our view, the large jump in the inclusion factor can boost the presence of foreign investors in the Chinese onshore equity market. According to the People’s Bank of China (PBoC), foreign investors held RMB 1.15 trillion (USD 171 billion) of A-shares as of December 2018. They accounted for 6.7% of the free-float market cap of the onshore market, thus almost trebling their presence from 2.3% in November 2015 (see Exhibit 4). Recent inflows into A-shares have been significant, with a record RMB 121 billion (USD 18 billion) via the northbound Stock Connect scheme in just the first two months of 2019 after RMB 294 billion in 2018 and RMB 199 billion in 2017.
Source: Wind, PBoC, HSBC, data as of 1 March 2019
Other catalysts have contributed to this rising foreign participation, including: 1) the doubling of the QFII quota to USD 300 billion; 2) the forthcoming combination of QFII and its RMB-denominated quota (RQFII); 3) broadening the investment scope to derivatives, bond repurchases and private funds; and 4) the addition by global index provider FTSE Russell of 5% of the free-float market capitalisation of A-shares to its emerging market indices due in June 2019.
Rising foreign participation should favour the increasing institutionalisation of the market. We believe this would be desirable given that the A-share market is now mostly retail-driven. In 2018, retail investors accounted for 35% of the total free-float market cap and 82% of daily turnover in 2017.
Our Greater China Equities investment team, managed by Lead Portfolio Manager Caroline Yu Maurer, generally favours Chinese market leaders that are competitive and unique. Northbound fund flows at the individual stock level suggest that foreign investors are mostly attracted to large-cap and more liquid stocks. Our team will particularly favour companies delivering sustainable and high-quality earnings growth at an attractive share price over the long term, benefiting from the following investment themes:
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