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MSCI is about to make its big call on world's worst stock market

[HONG KONG] Index-tracking global investors are about to find out whether they will be compelled to start buying shares in the world's worst-performing stock market.

MSCI Inc will announce early Wednesday morning Hong Kong time whether China's domestic equities will be added to its global benchmark gauges - a move that would initially spur inflows of as much as US$30 billion, according to HSBC Holdings Plc.

While inclusion would offer investors greater access to companies in the world's second-largest economy, the Shanghai Composite Index has tumbled 45 per cent in the past 12 months, including a 20 per cent loss this year.

The index compiler has been considering whether to include mainland-traded Chinese stocks since 2013. It twice put off approval, citing concerns about market accessibility among the reasons.

Issues have included quotas for foreign investors, the need for improvements in liquidity and further clarification of share-ownership rules. While the nation's authorities have taken steps to answer MSCI's questions, a 3.2 per cent selloff in the Shanghai Composite on Monday suggests mainland traders doubt officials have done enough.

This time last year, Chinese investors were much more exuberant - and leveraged. The benchmark stock gauge traded at a seven-year high on the eve of MSCI's decision amid record turnover and margin debt. Here's how China's stock market stacks up now.

The Shanghai Composite's loss in the past year is the biggest among 93 benchmark gauges tracked by Bloomberg. The Hang Seng China Enterprises Index of Chinese shares traded in Hong Kong is next worst, followed by Ukrainian equities. The MSCI All-Country World Index has dropped 7.7 per cent in the period.

As stocks have tumbled, so has turnover. The 30-day average of share-trading value fell to 154 billion yuan (S$31.7 billion) this month, down about 84 per cent from last year's peak.

While volatility increased on Monday as shares tumbled in late trading, price swings remain subdued - with Japan's Topix index having more extreme daily movements.

Unlike last year, where leveraged bets reached a record 2.3 trillion yuan around the time of MSCI's decision, margin debt has remained close to the lowest levels since 2014.

BLOOMBERG