Caution warranted on China stocks, despite inclusion in major indices

THE prospect of inclusion in major global indices is arguably one of several factors that have helped buoy China's stock markets over the past year. MSCI and FTSE have had the domestic China A-share market on their radar for some time.

Analysts have lost no time in generating projections of the potential flows that inclusion may herald. HSBC, for instance, says partial inclusion of China A shares in MSCI could see its 1.4 per cent representation in the MSCI Emerging Markets Index rise to 23 per cent. Partial inclusion could spur passive inflows of US$5 billion, it says. Full inclusion could see inflows burgeon to almost US$50 billion into the MSCI and FTSE indices from passive assets alone. MSCI itself expects an inflow of US$400 billion from pension funds, insurers and asset managers over time.

This week's decision by MSCI to put off inclusion of A shares until "a few important remaining issues related to market accessibility" are resolved is undoubtedly disappointing to many investors. FTSE, which has included A shares in transitional indices, expects to complete its review in September.