China shares are now in MSCI - July 02, 2017

China shares are now in MSCI

After a long wait, MSCI Inc. included mainland China stocks in its indices. The step was expected as China has opened its markets for a while now, and many believed that MSCI’s decision is due. After the news of inclusion, Chinese stocks started to surge.

Last September, we wrote about how MSCI Inc. didn’t include yuan based stocks in their Emerging market index due to the barriers foreign investors had to face. These constraints are constantly eased by the Chinese government and they led MSCI to include 222 A Grade stocks in their index. This is more than the formerly expected 169 but a bit less than it was rumoured a year ago.

After the decision of MSCI Inc., mainland China stock prices started to rise considerably: CSI 300 Index gained 1.2% in a day and had the highest close value since December 2015, according to Bloomberg. They also mention that this made “some analysts to speculate that state-backed funds may have bought shares”.

They need better regulations

This may be one of the reasons for MSCI to wait with adding more shares in the first round. However, they already stated that they would add additional stocks in the future, if China further eases regulations on suspending trade and rising (or completely revoking) daily trade limits.

There is also a high need for better local regulations, but according to rumours, Chinese government already took steps to reach that. China was eyeing with British rulings and trying to find a way to implement them.

They still must wait until 2018

China will have to wait for the real capital inflow for a while, since MSCI’s decision was not instant. The inclusion of Chinese stocks in the indices will happen in two steps from May 2018 to April, so capital may start flowing from those dates.

The total worth of China’s equities is around $64 trillion, so there is a lot to find there and the money that will go into China will be considerable. According to Goldman Sachs’ calculations, in the next five years $210 billion may flow into Chinese stocks from abroad.

Time for cautious investments?

China’s stocks are becoming more and more a consideration for investment. But before pouring too much money into the Eastern country, it’s important to remember: China still has serious problems with its markets. Just a year ago, Chinese stocks fell 20% in just some weeks and went on to fell 30% altogether before the government was able to stop the downtrend.

Therefore, caution and diversification are still important things to remember and they are even more significant when investing in a new area.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.