MSCI adjusts index weight for China’s A-shares 
2019-11-27
Global index compiler MSCI raised the inclusion factor for large-cap A-shares to 20 percent from 15 percent and included mid-cap A-shares in its global indexes with an initial inclusion factor of 20 percent. 
This marks the biggest round of weight increase in MSCI’s major indexes in 2019.
MSCI implemented the third step of the previously announced weight increase of China A-shares in the MSCI Emerging Markets Indexes.
Some 204 China A-shares, 189 of which are mid caps, were added to the MSCI China Index. The inclusion factor for 268 existing constituents was increased from 15 percent to 20 percent.
On completion, there will be 244 large-cap and 228 mid-cap China A-shares, representing a weight of 12.1 percent and 4.1 percent respectively in the MSCI China and MSCI Emerging Markets Indexes.
UBS Securities China Equity Strategy team estimated this could bring a potential net passive inflow of US$5.8 billion into the A-share market.
China International Capital Corp, meanwhile, expected the MSCI expansion to generate about 250 billion (US$35.51 billion) to 300 billion yuan in incremental capital for A-shares, up about 50 percent to 70 percent compared with the previous two rounds of weight increase in May and August.
The net northbound (to the Chinese mainland) inflow via stock connect schemes linking the mainland and Hong Kong reached 24.36 billion yuan yesterday to hit a record high for single-day influx, according to data from East Money Information.
The overseas capital into China’s stock market has exceeded 240 billion yuan since the beginning of this year, a recognition of international investors’ confidence in China’s financial market reform and long-term sound economic development, said Li Chao, vice chairman of the China Securities Regulatory Commission.
“Encouragingly, northbound inflows have strengthened since October with an influx of 60 billion yuan quarter till date, as US-China trade situation improved, yuan exchange rate vs the US dollar stabilized, and corporate earnings held up through the third quarter results season,” UBS said. 
Foreign investors have risen in importance in A-shares, UBS said. 
At the end of September 2019, foreign investors held 1.77 trillion yuan of A-shares, accounting for 3.2 percent and 7.9 percent, respectively, of the total market cap and the free-float of the A-share equity market, up from 2.4 percent and 6.7 percent at the end of 2018. 
“For 2020, we expect more foreign active inflows as GDP growth rebounds from Q2. A potential de-escalation of US-China trade tensions and the stability of the RMB exchange rate could boost offshore investors’ sentiment, in our view,” UBS said. 
“Assuming no MSCI inclusion factor hike in 2020, we estimate that total foreign inflows to A-shares may reach 300 billion yuan,” it said. 
