Share of global index delivers breakthrough for China

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CNYA tracks an MSCI index composed of Chinese equities listed on the Shanghai and Shenzhen Stock Exchanges. On the other hand, individual investors bought 295.2 billion won (US$258.49 million) worth of stocks.

MSCI first proposed to add domestically listed A shares to its benchmarks in 2013, but the plan was torpedoed by large asset managers who said China hadn't taken sufficient regulatory steps to make its market more open to investors.

These A-share stocks only account for 0.73 per cent of the index's weighting, based on a 5 per cent initial inclusion factor.

"Global investors should embrace this structural shift sooner than later, and reap the early-mover benefits in being fully positioned to participate in both onshore and offshore Chinese equities", said Mike Shiao, chief investment officer of Asia ex Japan. The Chinese equity market offers unique opportunities across sectors including technology and "new economy" stocks which we believe are key growth contributors to our Chinese equity portfolios.

"In short, there will be more foreign funds entering the 'A'share market", Fang said in comments carried by the Shanghai Securities News newspaper. This means that with a global recognition, China's opening up in its financial markets will not only impact itself, but could largely affect its neighbor countries.

China's financial system took another step towards integration with the rest of the world this week - but not quite the way that was envisioned years ago. Global stock benchmark provider MSCI has made a long-awaited decision to add mainland Chi.

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MSCI in March relaxed its criteria for inclusion by cutting the number of proposed stocks to 169 from 448 in a bid to address ongoing curbs on repatriating capital from China and investor concerns over the country's high number of suspended stocks.

How will inclusion proceed from here?

Shares of iShares MSCI Hong Kong Index Fund (EWH) traded up 0.43% during midday trading on Thursday, reaching $23.57.

Secondly, only stocks which can be traded through the Stock Connect programme in Hong Kong are included.

Last year, internationally listed Chinese stocks proved a better bet than their local counterparts.

Why a symbolic importance? The stock's 50 day moving average is $34.59 and its 200-day moving average is $32.63. iShares MSCI Taiwan Index has a one year low of $26.38 and a one year high of $35.53. The index now only includes shares of Chinese companies listed in Hong Kong or the US.

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Why symbolism can still matter?

We do not anticipate much impact on the CNY from the MSCI index inclusion. China never saw as extensive a brick-and-mortar buildout as developed markets in many industries. The long-term implication could be more significant.

"Investors should have A-shares in portfolios, especially emerging market investors", Luke Oliver, Head of U.S. ETF Capital Markets for Deutsche X-trackers USA, told ETF Trends in a call.

"For Beijing, the MSCI decision will be seen as another recognition for China's financial liberalization". Germany's DAX dropped 0.6 percent to 12,736.73.

What are the implications for global investors?

Chinese shares will join the index in June next year.

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"As it now stands, Chinese equities are not unattractive from a valuation (Shanghai trades at 16 times PE) and earnings growth perspective". Moving averages may be used by investors and traders to shed some light on trading patterns for a specific stock.

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