MSCI’s move to include A shares not necessarily bad news for other Asian markets

By Xiao Xin Source:Global Times Published: 2017/6/22 22:33:40

The landmark decision by MSCI to add mainland shares to its widely tracked Emerging Markets Index is likely to have wide influence in the Asian equity markets, as the index's portfolio weighting will inevitably shift away from other markets in favor of yuan-denominated stocks.

This appears to have rattled some nerves in the South Korean market, where capital outflows seem inevitable. Outflows of up to 4.3 trillion won ($3.77 billion) from the South Korean stock market are likely to be seen as a result of MSCI's decision to include A shares in its index, Jeong Eun-bo, vice chairman of the Financial Services Commission, South Korea's top financial regulator, said on Wednesday in a policy meeting, according to Reuters.

The addition of mainland stocks to the MSCI Emerging Markets Index will inevitably reduce the weighting of South Korean stocks in the index. According to the South Korean regulator, the weighting will decrease by 0.23 percentage points to 15.2 percent.

The numbers are not necessarily the key factor. A few trillion won is nothing to speak of for a country where the combined market capitalization in its main and secondary stock markets hit $1.55 trillion by the end of May. As Jeong put it, such capital outflows won't have a significant impact on South Korean equities.

It is perhaps the endorsement from MSCI for the global rise of A shares that might stir larger concerns. With the mainland equity market gradually rising to match China's status as the world's second-largest economy, A shares are set to appeal to a growing number of global investors who had previously been given limited access to the mainland market and had showed only limited interest in investing in mainland shares due to concerns about policy restrictions and wild market swings. A reversal of investor sentiment following MSCI's decision is thus expected to have a reshuffling effect in the Asian equity market. 

Nevertheless, this needn't necessarily be bad news for other markets in the vicinity. The long-awaited inclusion decision is likely to boost efforts to align the mainland equity market with international markets and thus turn the market, the world's second-largest with a combined capitalization of roughly $7.5 trillion, into a securities powerhouse that can benefit other markets in the long term.

The author is a reporter with the Global Times.


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