China A-shares make MSCI debut

Singapore

MORE than 200 of China's "A-shares" will make their way onto market index provider MSCI's indices on Friday, in a long-awaited move that observers say will encourage the flow of foreign funds into China.

However, they say that such gains may not felt immediately, as investors could be spooked by factors such as low corporate transparency.

The inclusion of some 234 A-share large-caps on indices such as the MSCI Emerging Markets Index (EMI) was announced in June last year. Fuller inclusion would see mid-caps counted, with Chinese shares earning higher index weightings.

Eli Lee, Bank of Singapore head of investment strategy, told The Business Times that Friday's additions "will be mostly symbolic, owing to the initially low inclusion factor, and is unlikely to have a significant impact on north-bound in-flows in the near term".

The MSCI inclusion is expected to put A-shares more prominently on the radar of foreign investors, including through index-linked funds.

Denominated in yuan and traded on the Shanghai and Shenzhen bourses, A-shares have faced historical curbs on offshore trade, which was left to Hong Kong-listed "H-shares".

Tuan Huynh, Asia-Pacific chief investment officer and wealth discretionary head at Deutsche Bank Wealth Management, said the move should trigger passive fund in-flows.

But he warned: "Given the recent volatility in both Chinese and international financial markets, we think the active fund in-flows into China could be limited at the initial stage."

Mr Huynh added that foreigners could be spurred to participate more actively in China equities, and that index inclusion "may help improve the corporate governance of Chinese companies in the long run" as well.

HSBC researchers agreed with this assessment in a Thursday report on environmental, social and governance (ESG) transparency. They wrote: "Almost all large-cap Chinese companies currently part of the EMI disclose some form of ESG information. However, information is not consistent nor uniform across constituents.

"The disclosure rate among new A-share inclusions is much lower, but likely to improve, in our view, as these companies gain more international exposure - from investors as well as overseas expansion."

Bryan Yeo, chief investment officer for public equities at Singapore sovereign wealth fund GIC, said in a statement provided to the media: "Institutional investor base in the A-share market will continue to rise as China's onshore equity market remains attractive to long-term investors.

"Many good businesses are listed in the A-share market and not on the H-share market, notably in the consumer, health-care and industrial sectors, which benefit the most from China's focus on high-quality development growth and strong growth in middle-income earners."

UBS has pegged index inclusion-related capital flows at US$18.4 billion at least, although Bin Shi, head of China equities at UBS Asset Management, noted: "That's not such a large amount when you consider the A-share market has an estimated free float capitalisation of US$3.4 trillion".

Frank Lee, a senior investment strategist at DBS, said: "The A-share inclusion is a milestone in Chinese securities development, but for the investment sense, this will have only a one-off impact. Corporate fundamentals are the most influential factor for share prices in the long run."

Dale Nicholls, Hong Kong-based portfolio manager for Chinese equities at Fidelity International, cautioned that "the A-share market is predominantly driven by retail Chinese investors who tend to be attracted to smaller, very-high-growth 'blue sky' businesses, for which valuations are often excessive".

"I tend to find the relative valuation of larger-cap names more attractive," he added, with Pudong Airport operator Shanghai International Airport being a stock pick.

The Bank of Singapore's Mr Lee also said that A-shares could also yield exposure to "attractive sectors and companies", such as brewer Kweichow Moutai, which could benefit from domestic consumption.

"Investors may not have access to these companies through the H-shares and other overseas exchanges," he noted.

Shanghai closed up by 1.78 per cent on Thursday, with Shenzhen higher by 1.80 per cent. Hong Kong added 1.37 per cent.