The Shanghai Stock Exchange. The ramp-up is happening at a time when a sudden bull market in Chinese shares is raising concern that the market is overheating. Image Credit: AP

Hong Kong

MSCI Inc will expand the weighting of China-listed shares in benchmark indexes tracked by global investors, a decision that could see billions of dollars flow into one of the world’s most volatile major stock markets.

The increase will occur in three steps this year beginning in May, with the weighting of Chinese A shares ultimately rising to 3.3 per cent of the MSCI Emerging Markets Index in November from 0.72 per cent, the company said in a statement. Shares listed on the tech-heavy ChiNext board will join its indexes for the first time.

Onshore stocks extended their advance in afternoon trading after swinging between gains and losses in the morning. The ChiNext gauge closed 2.1 per cent higher, after falling as much as 0.2 per cent. The Shanghai Composite Index climbed 1.8 per cent.

The weighting increase will contribute to making 2019 a record year for potential inflows to the A-share market, Harvest Global Investments estimates. Goldman Sachs Group Inc said the overall inclusion factor increase could usher in a potential $70 billion of net buying to A shares, while T. Rowe Price Group Inc says $40 billion could flow from active funds, without specifying a time frame.

MSCI added China’s domestic shares for the first time last June, following years of rejection due to accessibility. While some major hurdles had been resolved, concerns remain for foreign investors trading in China, where markets are prone to state intervention and dominated by local retail investors that have helped fuel boom-bust cycles. Capital controls still remain, with quotas — though hardly fully used — limit the amount that can be traded in a day through stock links with Hong Kong.

‘Many global investors will view China’s onshore stock market as a bit of a basket case, regardless of whatever MSCI do,’ Nicholas Yeo, head of China equities at Aberdeen Standard Investments, wrote in a note. ‘This is an inefficient market, after all, where 80 per cent of turnover emanates from local retail investors more easily swayed by the latest headlines than the earnings prospects of A-share companies.’

The ramp-up is happening at a time when a sudden bull market in Chinese shares is raising concern that the market is overheating. China’s stocks only gained a place in MSCI’s global indexes last year after Beijing took steps to improve market access. UBS Group AG forecasts flows of around $12.5 billion into China this year stemming from MSCI, as well as FTSE Russell, adding the nation’s stocks to their indexes.

The proposal to increase the weighting had overwhelming support from investors, MSCI said in a statement on Thursday New York time. “The strong commitment by the Chinese regulators to continue to improve market accessibility, evidenced by, among other things, the significant reduction in trading suspensions in recent months, is another critical factor that has won the support of international institutional investors,” the statement said.

There will be 253 large- and 168 mid-cap China shares in the index, including 27 ChiNext stocks, once the inclusion is completed, MSCI said.

Investors using index tracker funds will find more China-listed shares in their global portfolios following the changes. Hong Kong Exchanges & Clearing Ltd., cooperator of the stock connect cross-border trading link, also stands to benefit from the move. Its shares were 1.3 per cent higher in Hong Kong.

Institutional investors want China to make further changes before the inclusion weighting is increased again, including relaxing restrictions on futures contracts and other hedging tools, MSCI said. China’s same-day settlement cycle and the closing of the stock connect when there are public holidays in either Hong Kong or China were also highlighted among investor concerns.