At the beginning of June, MSCI INC. will add over 200 Chinese companies to equity gauges that help to direct the investment of around 12 trillion dollars.
Set to be published in May, this selection of shares will add a number of options for funds looking for new and untapped investment opportunities. This move is one that will significantly improve China’s access to global markets, as well as global markets’ access to Chinese business.
With just a 0.7% weighting in the MSCI Emerging Markets Index after this move, China will not initially seem like a huge force, there is an expectation that the offering could grow by as much as 14% as market rules match up with global expectations.
For comparison purposes, India has an 8.3% share, South Korea offers over 15% and Chinese shares from outside the mainland are at 28.6%. Though these figures do further highlight the relatively small percentage being offered here, it does also show some sense as to the growth that may be seen in the coming years.
The first introduction of the Chinese options will be spread over two days – the first in June and then the second in September. It is expected that this will drive around $17 billion in passive funds to the equity market, with inflows potentially rising to as much as $35 billion in years to come.
Debt Risk Concerns
Considered a huge win for China, this change will not necessarily remove reservations that investors currently have, but will help. Concerns around debt risk and capital controls will still remain in the mind, though likely not enough to deter from a greater involvement in a 1 billion person economy that is growing faster than the US.
This move comes after a strategy in February from China seemed to pay dividends. The China Securities Regulatory Commission urged brokerages to request that investors with stock pledges add to their collateral when share prices drop, instead of closing out the positions.
The CSRC is asking lenders to add to their pledges to avoid sharp declines in share prices. By doing so, the CSRC intended to buoy rather than downturn stocks, a strategy that seemed to work.
With these changes taking place so rapidly, and with the Chinese economy continuing to rise at an unparalleled rate, it seems highly likely that this could be the beginning of a seismic shift in global stocks.