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Positive signs for China’s onshore financial market

MSCI announced they will include China A shares in their Emerging Markets Index, starting next year in a two-step inclusion process in May 2018 and August 2018.

" The more progress that Chinese regulators make on liberalisation, the greater the potential for further inclusion."

A total of 222 China A large-cap stocks will be included, which will have a 0.73 per cent weighting in the MSCI EM Index at a 5 per cent partial inclusion factor.

ANZ Research do not expect to see a sudden surge in inflows in the near-term, given the long lead time to implementation next year. In any case, markets had been anticipating China’s inclusion this year, after having been passed over in the previous three years.

We do not anticipate much impact on the CNY from the MSCI index inclusion. To put it in perspective, the USD12bn in estimated inflows from inclusion is less than half of the USD27bn in net capital outflows China experienced in the month of May. ·

Nonetheless, the announcement bodes well for the ongoing development of China’s onshore financial markets. Following last year’s RMB inclusion in the IMF’s SDR basket, and now with China A share inclusion in the MSCI EM Index, the next natural progression will be the inclusion of China’s onshore bond market in the global bond market indices.

The potential inflows into China from bond inclusion are more significant, which we estimate could potentially be as much as USD100bn based on World Government Bond Index (WGBI) inclusion. However, we think this is more likely to occur next year. ·

The continued opening up of China’s onshore financial markets and increased foreign investor participation means China will be incentivised to further improve its regulatory transparency and oversight. The more progress that Chinese regulators make on liberalisation, the greater the potential for further inclusion.

Khoon Goh is Head of Asia Research

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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