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Several Chinese stocks listed on the U.S. stock exchanges are in focus, as Morgan Stanley Capital International (MSCI) decides whether to list mainland Chinese shares on several of its global indices. If it does happen, it will definitely be good news for the Chinese economy, which had a torrid run this year. This is because more money will flow into its sagging economy, eventually putting a ceiling to market volatility and fulfilling its need for foreign investments. Inclusion by MSCI will fuel demand for Chinese companies.
Is China Ready for Prime Time?
China is a huge part of the global economy, but still a large part of its stock market isn’t represented in most of the global indices. Is MSCI, the largest indexing firm in the world, trying to put that right by considering whether to include mainland China stocks on their global indices? This is in spite of the fact that regulatory countdown has pushed local traders away. China’s so-called A-shares or mainland China stocks had tanked to less than one-third of their value in the country’s two major markets – Shanghai and Shenzhen – in May from its peak level in Jun 2015.
Analysts round the world are debating whether mainland China shares are ready for prime time or not. In this context, Chinese authorities did address specific concerns of the MSCI, which more or less represent the concerns of the global investing community at large.
Too many trading halts in the Chinese stock market during the beginning of the year created havoc among foreign investors who had to deal with redemption requests. However, authorities had set a maximum period of stock halts at three months. Questions regarding foreign investors owning Chinese shares have been cleared. Chinese authorities confirmed that they do own such shares even though they are held by local asset managers. Authorities also added that foreign investors will be able to invest adequately depending on the size of the firm and can get their money out without much fuss.
Including China A-shares would be a Game Changer
The world’s second largest economy is in desperate need for foreign investments. In order to tame market volatility, institutionalize the onshore market and broaden the investor base, such investments have become essential. With the inclusion, hundreds of billions of U.S. dollars are expected to flow into Chinese stocks.
An inclusion of just 5% of A-shares will attract around $17 billion from funds tracking the MSCI Emerging Markets Index alone, as per HSBC Holdings plc (HSBC - Free Report) estimates. Moreover, it is anticipated that the inclusion will result in an inflow of an extra $20 billion to $30 billion in Chinese stocks over the next year.
MSCI also said that Chinese stocks’ index weighting could increase to 20% in the future provided Beijing allows foreign investors more access to its markets. Additional capital inflows will be able to offset capital outflows from its citizens.
What Lies Ahead?
The MSCI China A Index, which tracks A-shares, plummeted almost 46% over the past 12 months after MSCI decided not to include Chinese A-shares last June. However, this time around, MSCI is likely to welcome A-shares. Given the advantages of being listed and the steps taken by the Chinese authorities, MSCI is expected to take a gradual approach in listing all mainland Chinese shares.
The MSCI China A index has 420 stocks with a market capitalization of $800 billion. MSCI has already mentioned that the initial inclusion of China A-shares in the Emerging Markets index will be limited to 1.1% of the weight of the index. This proportion will gradually increase with the passage of time. A 1.1% weightage accounts for almost $16 billion that foreign investors need to acquire mostly within the next few months. Also to be noted is the fact that China A-shares with a full weight will be about 15% of the Emerging Market index.
Chinese Stocks Draw Attention
Chinese stocks had a horrible start to this year. But, if MSCI considers it fit to include China mainland shares in several of its indices then billions of dollars will undoubtedly be pumped into Chinese shares, resulting in a bull run. This means we will expect heavy trading volume in major Chinese stocks listed on the U.S. stock exchanges, including NetEase, Inc. (NTES - Free Report) , Ctrip.com International Ltd. , JD.com, Inc. (JD - Free Report) and 58.com Inc. . While NetEase boasts a Zacks Rank #1 (Strong Buy), Ctrip.com International, JD.com and 58.com carry a Zacks Rank #3 (Hold).
On the other hand, other Chinese behemoths listed on the U.S. stock exchange like Alibaba Group Holding Limited (BABA - Free Report) and Baidu, Inc. (BIDU - Free Report) don’t share the same fate as the above mentioned companies. While Alibaba Group has a Zacks Rank #5 (Strong Sell), Baidu, Inc., China’s answer to Alphabet Inc. (GOOGL - Free Report) , has a Zacks Rank #4 (Sell).
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China Stocks in Focus as MSCI Considers Inclusion
Several Chinese stocks listed on the U.S. stock exchanges are in focus, as Morgan Stanley Capital International (MSCI) decides whether to list mainland Chinese shares on several of its global indices. If it does happen, it will definitely be good news for the Chinese economy, which had a torrid run this year. This is because more money will flow into its sagging economy, eventually putting a ceiling to market volatility and fulfilling its need for foreign investments. Inclusion by MSCI will fuel demand for Chinese companies.
Is China Ready for Prime Time?
China is a huge part of the global economy, but still a large part of its stock market isn’t represented in most of the global indices. Is MSCI, the largest indexing firm in the world, trying to put that right by considering whether to include mainland China stocks on their global indices? This is in spite of the fact that regulatory countdown has pushed local traders away. China’s so-called A-shares or mainland China stocks had tanked to less than one-third of their value in the country’s two major markets – Shanghai and Shenzhen – in May from its peak level in Jun 2015.
Analysts round the world are debating whether mainland China shares are ready for prime time or not. In this context, Chinese authorities did address specific concerns of the MSCI, which more or less represent the concerns of the global investing community at large.
Too many trading halts in the Chinese stock market during the beginning of the year created havoc among foreign investors who had to deal with redemption requests. However, authorities had set a maximum period of stock halts at three months. Questions regarding foreign investors owning Chinese shares have been cleared. Chinese authorities confirmed that they do own such shares even though they are held by local asset managers. Authorities also added that foreign investors will be able to invest adequately depending on the size of the firm and can get their money out without much fuss.
Including China A-shares would be a Game Changer
The world’s second largest economy is in desperate need for foreign investments. In order to tame market volatility, institutionalize the onshore market and broaden the investor base, such investments have become essential. With the inclusion, hundreds of billions of U.S. dollars are expected to flow into Chinese stocks.
An inclusion of just 5% of A-shares will attract around $17 billion from funds tracking the MSCI Emerging Markets Index alone, as per HSBC Holdings plc (HSBC - Free Report) estimates. Moreover, it is anticipated that the inclusion will result in an inflow of an extra $20 billion to $30 billion in Chinese stocks over the next year.
MSCI also said that Chinese stocks’ index weighting could increase to 20% in the future provided Beijing allows foreign investors more access to its markets. Additional capital inflows will be able to offset capital outflows from its citizens.
What Lies Ahead?
The MSCI China A Index, which tracks A-shares, plummeted almost 46% over the past 12 months after MSCI decided not to include Chinese A-shares last June. However, this time around, MSCI is likely to welcome A-shares. Given the advantages of being listed and the steps taken by the Chinese authorities, MSCI is expected to take a gradual approach in listing all mainland Chinese shares.
The MSCI China A index has 420 stocks with a market capitalization of $800 billion. MSCI has already mentioned that the initial inclusion of China A-shares in the Emerging Markets index will be limited to 1.1% of the weight of the index. This proportion will gradually increase with the passage of time. A 1.1% weightage accounts for almost $16 billion that foreign investors need to acquire mostly within the next few months. Also to be noted is the fact that China A-shares with a full weight will be about 15% of the Emerging Market index.
Chinese Stocks Draw Attention
Chinese stocks had a horrible start to this year. But, if MSCI considers it fit to include China mainland shares in several of its indices then billions of dollars will undoubtedly be pumped into Chinese shares, resulting in a bull run. This means we will expect heavy trading volume in major Chinese stocks listed on the U.S. stock exchanges, including NetEase, Inc. (NTES - Free Report) , Ctrip.com International Ltd. , JD.com, Inc. (JD - Free Report) and 58.com Inc. . While NetEase boasts a Zacks Rank #1 (Strong Buy), Ctrip.com International, JD.com and 58.com carry a Zacks Rank #3 (Hold).
On the other hand, other Chinese behemoths listed on the U.S. stock exchange like Alibaba Group Holding Limited (BABA - Free Report) and Baidu, Inc. (BIDU - Free Report) don’t share the same fate as the above mentioned companies. While Alibaba Group has a Zacks Rank #5 (Strong Sell), Baidu, Inc., China’s answer to Alphabet Inc. (GOOGL - Free Report) , has a Zacks Rank #4 (Sell).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>