MSCI raises inclusion factor to 20%

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 its global indexes with an initial inclusion factor of 20 percent on Tuesday after market close. 

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 and the inclusion factor for 268 existing constituents was increased from 15 percent to 20 percent.

This indicated that China A shares have weights of 12.1 percent and 4.1 percent in the MSCI China and MSCI Emerging Markets Indexes, respectively.

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 yuan (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 on Tuesday to hit a record high for single-day influx, according to data from East Money Information.

In the first three quarters of this year, it is estimated that total foreign inflows to the A-share market totaled US$36 billion. Excluding US$15 billion of passive foreign inflows (US$9 billion from the first two MSCI A-share inclusion factor hikes, plus US$6 billion from FTSE's initial inclusion), US$21 billion in active foreign inflows took place, according to UBS Securities.

"Encouragingly, northbound inflows have strengthened since October with an influx of 60 billion yuan quarter to 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."

Foreign investors have risen in importance in A-shares, UBS said. At the end of September 2019, foreign investors held 1.77 trillion yuan (US$253 billion) 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. A potential de-escalation of US-China trade tensions and the stability of the yuan exchange rate could boost offshore investors' sentiment, in our view," UBS Securities said. "Assuming no MSCI inclusion factor hike in 2020, we estimate that total foreign inflows to A-shares may reach 300 billion yuan." 

"Pending MSCI's decision, we anticipate the inclusion factor to rise to 30 to 40 percent in the next few years, until it reaches 100 percent. Our calculation points to an A-share weighting of 16.6 percent in MSCI EM if the inclusion factor reaches 100 percent."