June 1 of this year the MSCI have successfully added 234 China-listed shares to its emerging market benchmark, a landmark event in the development of China’s internationalisation and institutionalisation of its capital markets.
The decision by MSCI to incorporate Chinese A-shares – renminbi-denominated stocks traded on the Shanghai and Shenzhen stock exchanges – is the positive result of years of developing a more open environment for offshore investors to access the China story – kick-started by the launch of the Qualified Foreign Institutional Investor scheme 16 years ago.
This year’s 5% partial inclusion will see China A-shares form roughly 0.73% of the MSCI EM index, and 0.1% of the MSCI All Country World Index. Analysts, including Huatai Financial, estimate approximately $20 billion will initially flow into Chinese stocks through passive investments, but this is a drop in the ocean compared to the $300 billion that is expected to flow in assuming full inclusion (but will be subject to further Chinese deregulation).
“The Chinese government has placed great emphasis on getting A-shares into the MSCI,” says Levin Wang, CEO of Huatai Financial Holdings (Hong Kong) [pictured]. “China is stepping out into the world. This should not only be good for Chinese companies benefitting from an injection of foreign capital, but also for offshore investors seeking opportunities into the Chinese market.”
Presently, the companies included in the MSCI mix are predominantly blue chips such as SAIC Motor and beverage company Kweichow Moutai, but future development will likely see the addition of mid-cap A-Shares – hopefully leading to investors more closely engaging in China’s exciting new growth industries such as healthcare and retail.
The picture for foreign investment in Chinese shares is positive and there is plenty of scope for growth, however restrictions on inbound investment still exist and the “northbound” quota through the stock connect schemes do not regularly hit capacity. Foreign investors do also have legitimate concerns. They are unfamiliar with Chinese companies and have questions about corporate governance, for example.
This is a crucial point. As investors get greater access to China, their understanding of the market dynamics will equally improve and so will their thirst to learn more. And this is where financial institutions such as Huatai are so important to this development.
Wang says: “We need to build a bridge from offshore investors and the Chinese capital markets. We need to help them know how the market operates, and the companies that operate within it. That’s why we have operations in Hong Kong – to build this integration.”
Wang and his team are in a good position to succeed. Huatai Financial Holdings is a wholly-owned subsidiary of Huatai Securities, China’s fourth largest broker by net assets and number three by net profits. With that historical pedigree, it is in a good place to advise foreign investors on the markets in China and exciting pre-IPO opportunities that are available. At the same time, this will help them support its Chinese clients as they go abroad.
“We are hiring from international competitors, market experts with energy and experience and they bring with them the trust of international investors who have been their clients for years,” says Wang.
Trust is a critical element in providing a bridge between China and the rest of the world. As much as there are many positive developments coming out of China there will still be tailwinds affecting growth and investment. Take the recent trade tensions between China and the US, for example. Clients need to know who to turn to understand what is happening and what to do with their investments.
But despite these issues the signal from China is clear: it is committed to finding new opportunities for institutional investors to access its domestic markets. Recent reforms such as the coming of Chinese Depository Receipts, and also the new QFII, and Renminbi QFII policies in June all prove that China continues to integrate its global economics and financial governance.
In terms of Chinese companies coming out, keep your eyes out for a host of young hungry companies, notably from the consumer, healthcare and technology sectors. “Those companies growing the fastest have the biggest desire to go out beyond China,” says Wang.
“They have the ambition to acquire companies that can support their expansion.”
And that’s what it’s about – ambition. And right now China has plenty of it.