China Shares in Emerging Markets Index Will Attract $40 Billion: JPMorgan

The long-awaited addition of China’s A-shares to the benchmark MSCI Emerging Markets Index next month will bring $40 billion of capital inflows to mainland stock markets, according to a top executive of JPMorgan.

Jing Ulrich, vice chairman of JPMorgan Asia Pacific, said global investors are preparing to increase their holdings of Chinese stocks in advance of the change by MSCI Inc., an American-based provider of equity indexes and market data. A-shares are yuan-denominated common stocks traded on Chinese securities exchanges.

JPMorgan estimates inclusion of Chinese shares in the index will draw around $6.6 billion of passive inflows into Chinese stocks, while active flows could be five times as much, Ulrich said Monday at a press conference before JPMorgan’s 14th Global China Summit opening Tuesday in Beijing.

After three straight years of failed attempts, China’s domestically traded A-shares finally won acceptance in June 2017 to be included in the MSCI benchmark tracked by $11 trillion of institutional funds globally.

MSCI will add more than 230 mainland-listed stocks to its Emerging Markets Index in a two-step process. China’s A-shares will represent a 0.8% weighting in the widely tracked index.

Ulrich said he expected more overseas-listed Chinese companies to be added to the MSCI index in the future, potentially giving China stocks even heavier weighting.

JPMorgan is optimistic on the outlook for China’s A-shares, expecting MSCI China’s average price-to-earnings ratio to be 12.9% in 2018, 0.6 percentage point higher than the average of emerging markets, Ulrich said.

Chinese stocks have relatively reasonable valuations and higher return–on-equity ratios compared with other emerging markets and some developed markets, indicating that Chinese companies have strong profitability, Ulrich said.

China has been stepping up efforts to open up its financial sector to foreign investors and persuade international investors that A-shares are investable.

In 2014, China launched its stock connect programs, offering mutual access for investors between the Hong Kong Stock Exchange and the Shanghai exchange. And in 2015, another stock connect program was installed between Hong Kong and Shenzhen.

Last month, People's Bank of China Governor Yi Gang announced that China would quadruple the daily quotas of the stock connect programs starting May 1. Yi also confirmed that China would launch a similar London-Shanghai stock connect program by the end of 2018.

Ulrich said these measures, together with the recent debut of China’s yuan-denominated crude oil futures and allowing foreign investors to trade domestic iron ore futures have boosted global investors' confidence in Chinese markets.