MSCI inclusion may only represent a small start but great things could lie ahead

By Ed Zhang Source:Global Times Published: 2017/6/25 19:13:40

Everything starts out small. It will be the same with China's role with MSCI, with the US index provider having decided on Wednesday to include A shares in its widely watched Emerging Markets Index.

But if it is a small beginning, it can still have big significance - just like the many small beginnings in China's reform and opening-up over the past 40 years.

In the first place, no one can afford to throw the door wide open to the Chinese A-share market. There are many technicalities to be sorted out. To facilitate the change, MSCI trimmed its original list of 448 candidate stocks almost by half.

There are still other problems or potential problems. But whatever they are, there is one major certainty: The Chinese securities market, in both stocks and in bonds, is on its way to becoming more international.

Chinese regulators have shown willingness to meet investors halfway by adapting to the international practices that they think they can afford. In fact, to paraphrase a recent speech by Zhou Xiaochuan, governor of the People's Bank of China, there is no better way to help the yuan play a larger role than to use the global capital market. In the long run, in order to protect the yuan's value in the world, Beijing will have to provide more ways, instead of fewer ways, for foreigners to use the Chinese currency.

Running an economy that is open not just to foreign goods and direct investment, but also portfolio investors, was only a dream 30 years ago. Had there not been support for openness and learning from the outside, the country would not have come this far. The inclusion of A shares into the MSCI index, however small in the beginning, is likely to lead to big things. Being under-represented in various global systems is a complaint that China often makes nowadays. Implicitly, a certain level of exposure to the volatility in the global financial market is acceptable and not to be afraid of because it is manageable.

China's A-Share market is reportedly worth $6.82 trillion, larger than the UK and German markets combined, and trails only the US. A market of such size by its nature serves as a major channel to diversify risk and seek fresh opportunities.

With regulatory improvements from Beijing, and risk control in both Shanghai and Shenzhen, and also through the trading connects in Hong Kong, the China market will earn its popularity among global investors in due time. And this is particularly important for Hong Kong. Hong Kong is reportedly preparing for the opening up of the country's bond market, which is worth more than $9 trillion at the moment, in the 2018-20 period.

It would be wrong to see the inclusion of A shares in MSCI's index as only symbolic. One always has to keep some faith in size and a large economy can always be interesting. Despite all the existing market defects, investing in China is far from a boring game.

The author is a Beijing-based financial services executive.

Posted in: INSIDER'S EYE

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