China blue chips end at 18-month high, buoyed by MSCI inclusion

Trevor Jackson
June 24, 2017

Stocks benchmark provider MSCI Inc. said Wednesday it will add mainland Chinese shares on its emerging markets index - after three previous rejections - a big step toward validating China's efforts to gain credibility with global investors and open its capital markets overseas. This is a positive change from iShares MSCI Hong Kong Index Fund's previous semiannual dividend of $0.21. We continue to encounter managements of large A-share companies who have yet to appoint an investor relations officer and who see no reason for senior management to meet shareholders. According to the SGX, of the 30 stocks that make up the STI, 10 stocks geographically segmented revenue or net revenue to China in their most recent financial year.

All the Chinese stocks set to be included are big-caps and can be easily accessed by foreigners through the "Connect" trading link between mainland and Hong Kong markets. Greater foreign investor participation could improve A-share's market composition, quality of corporate monitoring, regulation and reporting standards.

Also, investors were happy that index compiler MSCI placed Riyadh on the watch list for an emerging market upgrade.

Excitement over China's MSCI's inclusion continued to spur Chinese equities on Thursday, with banking shares taking the baton from consumer players in driving the blue-chip CSI300 index to the highest level in 1-1/2 years.

"We believe our clients will benefit from today's decision to bring Chinese equities into mainstream investment", said Ryan Stork, BlackRock's chairman for the Asia-Pacific in Hong Kong and one of the company's most senior executives, in an emailed statement.

Global stocks retreated and the yen strengthened after oil tumbled into a bear market on concern a supply glut will persist.

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Morgan Stanley Capital International's, or MSCI, has announced it will add China A-shares into its benchmark indices.

"In short, there will be more foreign funds entering the 'A'share market", Fang said in comments carried by the Shanghai Securities News newspaper. Ishares Msci Value Index Fund (EFV)'s Williams %R presently stands at -88.84.

Still, for many investors, China's local shares represent the future. After being up by as much as 1.6 percent earlier in the day, benchmark USA crude turned lower and was down $1.06, or 2.4 percent, to $42.4 per barrel.

The MSCI inclusion "paves the way for global capital inflows into China's A-shares", rating agency Moody's said in a report on Wednesday, projecting roughly $11 billion in near-term fund inflows into mainland stocks from funds benchmarked to the EMI. In the interim, MSCI has created a few provisional indices - for example, the MSCI China A International Large Cap Provisional Index is launched today - to ease the transition for investors.

"It's really in the hands of the Chinese stakeholders, they are dictating the timing". With macro condition stable and RMB actually appreciating lately, investing in Chinese stocks does not seem like a bad trade. But for markets in the region, "the impact may be second-order and likely only be felt in the longer term". We view this as expected and in some ways, long overdue.

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