MSCI not including China A shares for now

For a second time, MSCI announced that it would not include China A shares in its indices, until a few issues relating to market accessibility are taken care of.

Chinese national flag on a ferry crossing the Chang Jiang river in Wuha
Source: Bloomberg

These issues refer to the quota allocation process, capital mobility restrictions and beneficial ownership of investments.

Funds need to have the flexibility to invest in China relative to the value of their assets under management. Additionally, daily liquidity is also essential for fund management. The non-inclusion impact was immediate but relatively contained.

ASHR ETF (Deutsche China CSI 300 ETF) fell a further 0.7% after-market hours following the announcement, this is in addition to the 1.9% drop in Tuesday’s session.

Perhaps the silver lining, so to speak, is that MSCI says A shares remains on track to be included and may still announce a decision for inclusion into its indices outside the annual review. The early morning announcement suggests that China needs to step up its efforts to liberalise the A shares market, in particular, increasing foreign participation.

China may see some selling pressures today but retail investors are likely to be more concerned about the tightening of margin financing rather than the MSCI exclusion.

The China A50 index fell from the 15,000 handle yesterday, and dropped 1.7%. We see some support at the 14,000 mark ahead of the 50-day moving average of 13629. The CSI 300 is likely to encounter good support at the 5000 level. The 20-day moving average is seen at 4975.

In Hong Kong, the AH premium continued to rise, touching a six-year high of 142 on Tuesday 9 June. This indicated a widening gap between the A shares and H Shares. While the CSI 300 advanced well over 140% over the past 12 months, the Hang Seng China Enterprises Index, which is a representation of H shares, only managed a modest 30-40% gain.

BlackRock is still favouring the H shares as they view A shares as too ‘frothy’. I think that the gap will narrow at some point as Chinese mutual funds are allowed to invest more into the H shares market. If you look at the five-year average in the AH Premium index between 2010 and 2014, the A shares traded at an average premium of 3.5% over the H shares.

Decline in STI may persist

The Straits Times Index (STI) closed below 3300 yesterday, which brings 2015 lows to 3267.89 in focus. Bearish momentum may persist today although several positive news may limit any downsides.

Loyz Energy is seeking a listing on the SGX mainboard after agreeing to acquire Primeline Energy Holdings (listed on Canada’s TSX Venture Exchange) in a reverse takeover deal. Elsewhere, Moody’s affirmed the three Singaporean banks with a stable outlook.

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