Wary investors eye China's back-door entry into MSCI indexes

Mon Nov 2, 2015 4:15am EST
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By Saikat Chatterjee and Michelle Price

HONG KONG (Reuters) - MSCI (MSCI.N: Quote) will begin to add overseas-listed Chinese shares to its emerging market indexes this month, drawing billions of dollars into such stocks, which could eventually lead to mainland-listed companies finding their way into global equity portfolios.

The index provider's decision in June not to include domestically listed China stocks, known as A-shares, in its global indexes, which are tracked by equity funds holding trillions of dollars, contributed to a sharp sell-off, prompting Chinese authorities to launch a heavy-handed rescue operation.

The inclusion of overseas-listed China shares, known as American Depositary Receipts (ADR), will be the first test of foreign demand for greater exposure to China since its markets returned to an even keel after a stormy summer.

Beijing wants to encourage more overseas capital into the mainland's financial markets, but foreign investors took a dim view of the market distortion caused by the government-directed intervention. Chinese shares listed on overseas markets, however, are not affected by such measures.

"Not only do they offer a great way to get into China businesses that are geared towards the consumption story, (but also) being listed in the U.S. means they are prevented from the kind of manipulation we have seen in the China markets over the summer,” said Marc Chandler, global head of FX strategy at Brown Brothers Harriman.

Analysts estimate the index rebalancing will trigger up to $70 billion in total flows into these stocks over the next six months and increase China’s weight in the MSCI Emerging Market (MSCI EM) index, which only includes Chinese stocks listed in Hong Kong, to more than 26 percent from just over 23 percent.


An investor walks past an electronic board showing stock information at a brokerage house in Fuyang, Anhui province, China, October 9, 2015.  REUTERS/China Daily