Caixin
May 14, 2019 08:32 PM
FINANCE

MSCI Indexes to Include ChiNext Stocks for First Time

A man reads a newspaper on May 6 at a securities company in Beijing where investors can watch stock price movements. Photo: VCG
A man reads a newspaper on May 6 at a securities company in Beijing where investors can watch stock price movements. Photo: VCG

Global index provider MSCI Inc. is adding companies listed on Shenzhen’s ChiNext board to its indexes for the first time and taking step one in its three-phase plan to more than quadruple the weighting of Chinese mainland-listed shares in its benchmark Emerging Markets Indexes.

MSCI will add 26 Chinese A-shares to the MSCI China Index, increasing the number of companies in the index to 264 on May 28, the New York-based company said in a statement Monday to announce the results of a semi-annual review of its indexes. Of the new entrants, 18 are listed on ChiNext, a Nasdaq-style board for innovative, fast-growing companies including high-tech enterprises. They include internet information services provider Hithink Flush Information Network Co. Ltd., poultry and pork farmer and processor Wens Foodstuff Group Co. Ltd., and medical-instruments maker Shenzhen Mindray Bio-Medical Electronics Co. Ltd., which abandoned its U.S. listing in 2016 to return to China.

The 238 existing constituents in the MSCI China Index will also see an increase in their inclusion factor, an adjustment that lowers a company’s market value to reflect restrictions on the free float of shares for foreign investors, to 10% from 5%. That will give companies a higher market capitalization and consequently a greater weighting in the MSCI Emerging Markets Indexes.

When the changes become effective after the market closes on May 28, Chinese A-shares will have an aggregate weight of 1.76% in the MSCI Emerging Markets Indexes, up from 0.75% in September 2018. A-shares will also see their weighting in the MSCI China Index rise, initially to 5.25% by the end of May.

Milestone moment

MSCI officially included A-shares in its widely tracked indexes for the first time in June 2018, marking a milestone in China’s campaign to integrate its equity markets into the global economy and attract foreign investors into domestic capital markets. Inclusion in the MSCI indexes means that global investors who track those gauges will have to buy the shares of the constituent companies, which they can do through the Stock Connect programs that link the Hong Kong exchange with those in Shanghai and Shenzhen.

After the breakthrough, MSCI consulted with foreign institutional investors over increasing the inclusion of A-shares in its indexes and on Feb. 28 announced that it would do so in three phases — in May, August and November, which would see the inclusion factor of mainland shares rise to 20% from 5% at the end of 2018 and the weighting of the shares in the Emerging Markets Indexes to 3.3% from 0.7%. As part of the process, the index provider said it would add shares listed on the ChiNext board.

The changes announced Monday are expected to attract $17.27 billion into China’s stock markets, Zhang Yulong and Luo Yongfeng, analysts with CSC Financial Co. Ltd., said in a note Tuesday. They estimate that after all three phases of the plan are complete, a total of $65.4 billion in foreign investment will flow in.

China’s stock markets have been among the world’s best performers this year. The benchmark Shanghai Composite Index surged 31.2% to a high of 3,270.8 on April 19, and although it has since dropped by around 12%, it is still up 15.6% so far this year.

Foreign investors have been net sellers of Chinese stocks this month. China’s stock markets were closed from May 1 to May 3 during a public holiday, but in the first four trading days of the month from May 6 to Thursday, a total of net 17.4 billion yuan ($2.5 billion) worth of shares were sold through the Stock Connect programs with Hong Kong.

MSCI also announced changes to some of its other China indexes. A total of 29 stocks will be added and five removed from the MSCI China A Mid Cap Index, resulting in 173 index constituents, while the MSCI China A Onshore Index will have 109 additions and three deletions. There will be 503 additions to and 49 deletions from the MSCI China A Onshore Small Cap Index, with most of the additions newly eligible ChiNext stocks.

Contact reporter Liu Jiefei (jiefeiliu@caixin.com)

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