[Exclusive] MSCI Is Likely to Hike China Weighting to 20%, Northern Trust's Wu Says
Emmi Laine
DATE:  Feb 19 2019
/ SOURCE:  yicai
[Exclusive] MSCI Is Likely to Hike China Weighting to 20%, Northern Trust's Wu Says [Exclusive] MSCI Is Likely to Hike China Weighting to 20%, Northern Trust's Wu Says

(Yicai Global) Feb. 19 -- Global stock index compiler MSCI will probably fulfill market expectations and at least quadruple the weighting of Chinese equities in its flagship benchmarks, according to the country executive for China at US custodian bank Northern Trust.

At the moment, New York-based MSCI has a 5 percent weighting for Chinese mainland big caps. It uses that percentage of a firm's freely floated market cap to determine its specific weight in any given index. Last September, MSCI said it would consider raising the inclusion factor to 20 percent in two steps in May and August of this year.

"We expect, and that is something that the market also expects, MSCI to gradually increase from 5 percent, hopefully to 100 percent sometime, given how well it has gone since last year," Michael Wu, who oversees Northern Trust's business in China, told Yicai Global in an exclusive interview on Feb. 13. 

MSCI added 234 so-called A-shares, or stocks traded on the mainland exchanges in Shanghai and Shenzhen, to its global indexes for the first time in June 2018. The addition on these shares, which included Industrial and Commercial Bank of China, PetroChina and white goods maker Haier, was an important move in opening up the Chinese market to foreign investment.

Following that initial inclusion, institutional investors gave an overwhelming amount of positive feedback, Wu said. Given how smooth the implementation was, it would be natural to lift the factor, he added.

Wu believes MSCI is "thinking about the 20 percent, which is not unreasonable." 

That move could bring USD80 billion of offshore investment into the world's second-largest economy, Reuters reported last November. The tally for the initial 5 percent inclusion was USD22 billion, MSCI estimated last May. 

Reform and Opening Up

But regulation may restrict MSCI's master plan. The inclusion depends very much on stock connect schemes -- Shanghai-Hong Kong and Shenzhen-Hong Kong -- but those have a narrow investment scope and daily caps on volume, Wu said, adding that all depends on how fast China continues to reform and open up its markets to provide more investor confidence in terms of accessibility, beneficial ownership, tax, and other registry issues.

China expanded each of the two schemes' daily northbound quotas to CNY52 billion (USD7.7 billion) in May last year.

"We haven't hit the daily quotas yet, but if the intention is to move the inclusion factor from 5 percent to 20 percent, or even higher, then there's a question whether that quota is efficient," Wu said.

What may test the adequacy of the trading quotas is that other overseas investment firms are joining the queue to use them up. London-based FTSE Russell and New York's S&P Dow Jones Indices have pledged to add Chinese equities to their global benchmarks later this year.

Despite being the world's second-largest economy, China still enjoys a much faster growth rate than many developing economies, which represents investment opportunities that all index providers are looking to include, Wu said. 

Benchmark developers, however, do not time the market or evaluate the quality of it, which leaves the important decisions for investors to assess, and that may be difficult in China, said Wu, who has headed Northern Trust's offices in Beijing and Hong Kong for over four years.

Transparency Issue

Foreigners may have trouble understanding Chinese corporate governance and how that affects daily operations in listed companies, Wu said, adding that many small and mid-sized domestic firms publish annual reports only in Chinese. Last year also showed that policymakers started to push for reforms to attract foreign capital only when the market was in distress, which raises questions of transparency, according to Wu. 

MSCI has assessed 423 mainland-listed companies which make up the MSCI China A International Index and 86 percent of them got a rating below the median BBB due to lack of communication, Yicai Global reported last October. 

Other points for improvement that Wu mentioned were equal access to trade as well as capital controls, because each investor wants to be absolutely certain that they can access the market when they would like to, as well as repatriate their capital.

"Foreign investors continue to ask for transparency and consistency in policy to make sure that the Chinese market lives up to the global standards," Wu said. China will benefit from the entrance of more foreign capital in ways that the market will become more institutionalized and internationalized, he added.

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Keywords:   MSCI,A-shares,Northern Trust,Michael Wu,Financial Reform