MSCI to Boost Weighting of Chinese Stocks as Bull Market Builds

Feb 28 2019, 10:15 PMFeb 28 2019, 11:41 PMFebruary 28 2019, 10:15 PMFebruary 28 2019, 11:41 PM

(Bloomberg) -- MSCI Inc. will expand the weighting of China-listed shares in benchmark indexes tracked by global investors, a decision that could see billions of dollars flow into one of the world’s most volatile major stock markets.

The increase will occur in three steps, with the weighting of Chinese A shares ultimately rising to 3.3 percent of the MSCI Emerging Markets Index, MSCI said in a statement. Shares listed on the tech-heavy ChiNext board will join MSCI indexes for the first time.

The ramp-up is happening at a time when a sudden bull market in Chinese shares is raising concern that the market is overheating. China’s stocks only gained a place in MSCI’s global indexes last year after Beijing took steps to improve market access. UBS Group AG forecasts flows of around $12.5 billion into China this year stemming from MSCI, as well as FTSE Russell, adding the nation’s stocks to their indexes.

The proposal to increase the weighting had overwhelming support from investors, MSCI said in a statement on Thursday New York time. “The strong commitment by the Chinese regulators to continue to improve market accessibility, evidenced by, among other things, the significant reduction in trading suspensions in recent months, is another critical factor that has won the support of international institutional investors,” the statement said.

Upon completion there will be 253 large- and 168 mid-cap China shares in the index, including 27 ChiNext stocks, it said.

As a result, investors using index tracker funds will find more China-listed shares in their portfolios following the changes. Hong Kong Exchanges & Clearing Ltd., co-operator of the stock connect cross-border trading link, also stands to benefit from the move.

Institutional investors want China to make further changes before the inclusion weighting is increased again, including relaxing restrictions on futures contracts and other hedging tools, MSCI said. China’s same-day settlement cycle and the closure of the stock connect when there are public holidays in either Hong Kong or China were also highlighted among investor concerns.