MSCI's reweighting to see surge in foreign capital

Global index provider MSCI announced Thursday it will expand the weight of China A-shares in the benchmark Indexes by quadrupling the inclusion factor from 5 percent to 20 percent in three steps, a move expected to draw a surge of fresh foreign capital into the world's second-largest economy.

According to the announcement on the indexer's website, the addition will happen in May, and the yuan-denominated A-shares will ultimately see their weighting shoot up to 3.3 percent in the MSCI Emerging Markets Index from the current 0.72 percent, as the inclusion factor increased to 20 percent in November.

Shares on ChiNext board, which mainly lists high-tech companies and those with high growth potential, will join MSCI indexes for the first time.

Upon completion of the decision, "there will be 253 Large and 168 Mid Cap China A-shares, including 27 ChiNext shares, on a pro forma basis in the MSCI Emerging Markets Index", said the announcement.

"Stock Connect has proven to be a robust channel to access A-shares. The successful implementation of the initial 5 percent inclusion of China A-shares has been a positive experience for international institutional investors and has fostered their appetite to increase further their exposure to the mainland China equity market," Remy Briand, MSCI managing director and chairman of the MSCI Index Policy Committee, said in the announcement.

"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."

Fang Xinghai, deputy head of China's securities regulator, predicted at a forum in January that the country's stock market will see an inflow of foreign capital totaling about 600 billion yuan ($88.76 billion) this year, doubling the inflow of 300 billion yuan recorded last year.

Fang attributed the rosy prospects to global investors' confidence in the Chinese economy in the long term and more access to domestic capital market thanks to Stock Connects and the inclusion of A-shares into global indices.

Morgan Stanley also projected a record-breaking foreign capital inflow into A-share market, saying a total range between $70 billion and $125 billion from overseas investment will go to the market this year, well above the average level of $35 billion in the past three years.

Rival index publisher FTSE Russell and S&P Dow Jones Indices will both start to include Chinese shares to their global benchmarks this year.

Still, MSCI looks forward to promoting developments in issues, including permitting the listing of index futures and other derivatives on onshore and offshore exchanges to help address international institutional investors' growing needs for further risk management tools, as well as making further improvements in the settlement cycle, trading holidays and omnibus account structures, ahead of any future weight increases of China A shares in the MSCI Indexes.

The benchmark Shanghai Composite Index rose 0.14 percent to 2,945.05 points in the morning session on Friday, while the Shenzhen Component Index landed in at 9,036.36 points, up 0.05 percent, and the ChiNext Index, China's NASDAQ-style board of growth enterprises, jumped 0.57 percent to 1,544.37 points.