It’s Decision Time for MSCI as Global Rally Bypasses China

  • Investors will find out if it’s fourth-time lucky for A shares
  • Mainland stocks have struggled this year amid deleveraging

MSCI to Decide on Saudi Emerging Markets Inclusion

China’s fourth attempt at cracking into MSCI Inc.’s benchmark share indexes comes with its best chance of success -- and the least at stake.

In what’s become an annual event, MSCI will announce at 4:30 a.m. Hong Kong time on Wednesday whether China’s domestic stocks have won inclusion. Previous efforts have foundered on concern over repatriation limits and excessive trading suspensions, obstacles the index compiler has sought to overcome with a less ambitious proposal.

While the decision still holds weight for investors, the swings of the nation’s $6.9 trillion equity market are losing relevance for traders in London and New York more attuned to a global technology rally and signals from the Federal Reserve. Even if yuan-denominated shares are added, they would be dwarfed by overseas-listed Chinese stocks, which have an increasing sway over MSCI’s developing nation gauge.

Conning Asia Pacific’s Marc Franklin says still some work to be done before China’s full inclusion in MSCI.

Source: Bloomberg

China’s benchmark Shanghai Composite Index has struggled this year amid a government campaign to cut risk in the financial sector and waning interest by the nation’s army of individual investors. The gauge has fallen more than 4 percent since its mid-April peak, the most among major global peers, helping send correlation ratios with the rest of the world to below zero.

While mainland equities have been losing value, the nation’s stocks traded offshore have surged toward two-year highs, led by technology firms. The MSCI China Index has jumped 25 percent in 2017, helping propel Tencent Holdings Ltd. and Alibaba Group Holding Ltd. into the ranks of the world’s largest companies with market values of more than $330 billion each.

The gains by Tencent and others mean Chinese companies already account for six of the 10 largest companies by weighting on the MSCI Emerging Markets Index as of the end of last month, and eight of the 10 biggest by market value. Under the latest proposal, the total allocation of yuan-denominated A shares would be just 0.5 percent of the gauge, half the previous suggested level and equivalent to the current weighting of Netease Inc., a Chinese game and website operator worth $41 billion.

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