The Daily Update - China receives MSCI approval

As was widely expected, MSCI Inc. announced that it is to include Chinese A-shares on the world's most followed Emerging Market Indices; a symbolic victory for China. According to the statement, 222 of China’s large-cap onshore stocks will be included in the MSCI Emerging Markets Index via a two phase process from May to August next year. MCSI stated: ‘This decision has broad support from international institutional investors ... primarily as a result of the positive impact on the accessibility of the China A market of both the Stock Connect program and the loosening by the local Chinese stock exchanges of pre-approval requirements’.

Although China will initially represent a modest ~0.73% weight within the indices, or ~USD 11bn worth of flows, it is another stride on the road to internationalising the renminbi and integrating China further into the global financial system. With China’s ever growing international presence, coupled with its massive USD 7tn equity market, its proportion within the indices is expected to grow from the stated 5% Inclusion Factor. With that in mind, the global equity indexes provider stated that ‘MSCI is very hopeful that the momentum of positive change witnessed in China over the past years will continue to accelerate’.

This move for inclusion on a closely monitored and  widely invested international index, could also boost the demand for China's onshore Government bonds (CGB) and Policy Financial Bonds (PFB) on global bond indices; especially after the steps China has taken to bring these instruments to the international stage. The likes of the Citigroup Inc, Bloomberg Barclays and JP Morgan could look to increase / include CGBs on their dominant bond indexes; with the former two announcing inclusion this year and next. Estimates are for ~USD  1tn of flow into these instruments over the next five years.

Meanwhile, markets were surprised that MSCI did not upgrade Argentina from its current frontier market status to its previous emerging market standing despite the introduction and improvement of several market-friendly policies. This decision comes despite the successful launch of a 100-year bond earlier this week which saw strong demand; said to be over 3 times oversubscribed. In its statement, MSCI said ‘Although the Argentine equity market meets most of the accessibility criteria for Emerging Markets, the irreversibility of the relatively recent changes still remains to be assessed’. Argentina will therefore have to wait another year to be reconsidered emerging. Markets will now look to the mid-term elections in October where it is hoped that Mauricio Macri, who is seen as the country’s visionary, will receive sufficient support to push forward with much needed reform programmes, which have so far received international acceptance and investment support.

On a positive note, the Saudi Stock Exchange (Tadawul) was added to MSCI’s EM watchlist; which will involve consultation with a selection of key investors. The GCC’s largest equity market has witnessed a wave of change in recent years; for example the implementation of more investor-friendly rules including T+2 settlement, which no doubt appeals to foreign investors. The index provider stated: ‘Following the introduction of these major enhancements to the accessibility of the Saudi Arabian equity market, MSCI will be consulting with international institutional investors to gather informed feedback on their practical experience of accessing the Saudi equity markets and in particular on the effectiveness of the recently implemented enhancements’.