Mainland China exchanges shrug off MSCI index inclusion; foreign investors in wait-and-see mode

MSCI Inc., publisher of the Emerging Markets (EM) Index, decided on June 20 to include mainland China shares in its MSCI EM Index (BOFIT Weekly 25/2017). The decision had little immediate impact on share prices. The biggest effects were seen in the share prices of large firms, i.e. those to be included in the MSCI EM Index next year. The CSI300 Index of 300 firms listed on the Shanghai and Shenzhen stock exchanges and the SSE180 Index of 180 firms listed on the Shanghai exchange have both risen 3 % since MSCI's decision to include Chinese shares.

Although mainland Chinese stock indices have been relatively stable this year, Chinese shares listed on foreign exchanges have done better. MSCI's China index is up over 20 % and the Hong Kong stock exchange's China Enterprise Index is up 10 %. However, shares of Chinese firms in Hong Kong are over 20 % cheaper than shares of the same firm listed on a mainland China stock exchange.

Foreign investments in mainland Chinese stock markets do not seem to have increased significantly in the immediate wake of the MSCI decision. The average volume of stock trading via the Stock Connect programme with Hong Kong has seen a slight increase since early summer, while the total transaction value of shares only represent 3 % of the Shanghai exchange's turnover and just 2 % of Shenzhen's turnover.

Qualified foreign investors can also trade on mainland-China's stock markets under the QFII and RQFII programmes. As of end-March, foreign investors held shares traded only in mainland China worth 780 billion yuan (113 billion dollars). That amount corresponds to 1.4 % of the market capitalisation of all Chinese stock markets. MSCI estimates that the implementation of its expanded EM Index next year will boost foreign holdings of mainland Chinese share immediately by about 17 billion dollars.

The inclusion of mainland Chinese firms will take place in two steps in May and August 2018. The EM Index will initially include 222 Chinese firms with more to be added later. Over two-thirds of the included firms are owned by the state or local governments, which has aroused suspicions concerning e.g. the actual power of shareholders to influence corporate decisions. The state still plays a huge role in stock markets, so any further increase in the weight of mainland Chinese shares in the MSCI EM Index will require further stock market reforms.