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Summary

  • MSCI is considering adding China's local shares to its indices.
  • It will consult with fund managers before deciding in June.
  • There has been a significant out performance of China's small cap shares over large cap.

Two weeks ago, MSCI indicated that it was considering including China's A-shares (yuan-denominated mainland shares) into its emerging market equity index. It plans on consulting with 2000-3000 fund managers, with a decision expected in June. If it does decide to include China, it most likely won't be until mid-2015.

The early results are thought to be mixed. While some fund managers are sympathetic, others have reportedly expressed concern about the investment quotas, capital gains tax and capital controls.

China's stock market capitalization is about $3.3 trillion and is the fifth largest in the world. MSCI estimates that some $12 bln could flow into China stocks if it were to be included in its indices, with $8 bln going into the MSCI Emerging Market equity index. Private sector estimates tend to be considerably smaller. Some reports single out the large banks, like China Merchant Bank and the Agricultural Bank of China as likely beneficiaries.

The Qualified Foreign Institutional Investor (QFII) facility through which foreign investors are giving a quota of investments that they can make has been steadily increased. A little more than $52 bln of foreign investment from a little more than 230 investors has been approved.

China's Securities Regulatory Commission has indicated that it will increase the QFII quota again this year. It has overseen a cut in trading fees and has pushed companies to boost dividends, in part to boost the attractiveness of local shares. There has been a stark contrast in China (and in many other markets) between the large cap and small cap performances. As a rough proxy, consider that the Shanghai Composite is off 11% over the past 12-months, while the Shenzhen Composite is up nearly 13%. This year, the former is down 2.3% and the latter is up 2.4%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.