MSCI to include China in its benchmark EM equity index - Rabobank

In one of totally unsurprising surprises, early this morning MSCI Inc. took the decision to include China in its benchmark EM equity index at the fourth time of asking despite the fact that the issues on which is was rejected the previous three years are still unresolved, explains Michael Every, Senior Asia-Pacific Strategist at Rabobank.

Key Quotes

“That MSCI thumbs-up opens the USD6.8 trillion Chinese domestic market to foreign investors wielding USD1.6 trillion in capital in a two-stage process around a year from now. Indeed, investors will have to automatically allocate capital into China due to its new MSCI status. Expect triumphalist fireworks today from the Chinese and financial media and perhaps a slight bump in CNY and Chinese stocks, which are cheap relative to elsewhere – but arguably only because they got their ridiculous bubble in two years early: do we really need another one so soon?”

“Indeed, let’s not get too excited. The overall weighting is just 0.73% of the total EM index, higher than the 0.5% first mooted, but far below China’s actual size, and covers only 222 stocks. By comparison, Pakistan’s MSCI weighting is 0.16%, so China is around 4.5 times as important as that global equity bell-weather. And let’s do the math on what those inflows might mean for China in terms of its balance of payments problem: 0.7% of USD1.6 trillion is just USD11 billion in total inflows; that’s into a USD6.8 trillion market; and into just 222 stocks in total - hardly the definition of “game changer” for either CNY (in terms of inflows to counter-balance constant outflows) or for Chinese equities themselves. True, there is the promise of a further increase in China’s weighting if it proceeds with a deepening of market reforms.”