Latest MSCI China Inclusion Is Bigger Deal for Global Funds

(Bloomberg) -- Many international investors who stayed away when MSCI Inc. first added Chinese stocks to its benchmarks are expected to jump in when the second phase of inclusion takes place after Friday’s close.

This time round there’s likely to be more turnover than on the initial inclusion day three months ago, when about 35 billion yuan ($5 billion) in Chinese equities traded via Hong Kong, said Stephane Loiseau, head of cash equities and global execution services in Asia-Pacific at Societe Generale SA.

Despite an escalating trade war between the U.S. and China, foreign money managers seem ready to head into a market that has slumped 17 percent this year, said Loiseau -- a sign that the long effort by authorities in Beijing to have their equities more fully integrated into the global financial system is starting to pay off.

“The first event was probably overly represented by local and regional institutions,” Loiseau said in an interview.

Richard Heyes, the Hong Kong-based Asia Pacific head of equities at Citigroup Inc., and David Rogers, managing director and head of trading for Asia Pacific at State Street Global Advisors, a unit of State Street Corp., both also said they foresee higher turnover this time.

Some investors may be glad they missed the first phase -- the Shanghai Composite Index went on to post its biggest monthly drop in more than two years in June amid concern over the trade dispute and a slowing economy. Wendy Liu, an analyst at Nomura Holdings Inc., warned that Chinese stocks could still see a repeat of that selloff.

New York-based MSCI denied Chinese-listed companies entry to its benchmarks for years, before selecting more than 200 that can be accessed through trading links between Hong Kong and exchanges in Shanghai and Shenzhen.

Investors had bought a net 1.4 billion yuan ($205 million) of Chinese shares through the stock links as of 1:33 p.m. Friday, according to data compiled by Bloomberg.

The initial weighting for stocks from one of the world’s biggest markets will be small -- accounting for around 0.8 percent of MSCI Emerging Markets Index -- but may rise to 16.2 percent over time, MSCI has said.

Further reading on MSCI inclusion of mainland-China shares:

• Why China’s First Steps Into MSCI Are Such a Big Deal: QuickTake
• China’s Unloved Stocks Return to Center Stage on MSCI Changes (Video)
• Mobius Says MSCI Inclusion to Have Substantial Impact (Video)
• China Could Overtake Japan in MSCI Indexes by 2023, Nomura Says
• Chinese Stocks Decline as MSCI Inclusion Fails to Lift Sentiment

To contact the reporters on this story: Benjamin Robertson in Hong Kong at brobertson29@bloomberg.net;Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net

To contact the editors responsible for this story: Sam Mamudi at smamudi@bloomberg.net, Will Davies

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