The global stock-index compiler MSCI deferred the addition of China A-shares to the MSCI Emerging Market index, citing investing quotas and capital mobility.
In an interview to CNBC-TV18, Ben Cavender of China Market Research Group, says the China shares aren’t undervalued anymore and it could be added to the index in the next six-eight months. The MSCI has said the inclusion will remain on the 2016 review list.
Cavender says China could see inflows in the range of USD 20-50 billion once A-shares are included.
Below is the verbatim transcript of Benjamin Cavender's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: The Morgan Stanley Capital International (MSCI) has raised issues of capital mobility and quota allocation among other things as reasons why it is not yet including too much of the A-shares in the index. How do you think things are going to proceed from hereon? Do we expect that 5 percent will be included next year?
A: I think MSCI has signaled that their interest in adding A-shares so was absolutely moving in that direction. The big issue right now is quotas allocated to foreign investors right now are still currently too small. Right now quotas only account for about 5 percent weighting for the emerging market index whereas if the entire A-share market were added to the MSCI – that weighting would jump up to close to 25 percent. So basically what we are looking to see going forward is quotas getting whole lot larger and making it easier for foreign companies get their money in and out of the market.
Latha: I am sure you are looking at the way China is progressing on these matters. Is China poised to increase foreign participation beyond this 5 percent very rapidly?
A: It seems like they are moving in a direction and maybe more quickly than people might think. Last year we had the Shanghai, Hong Kong Stock Connect programme open up. Looking at the Q1 this year we are going to see the Shenzhen market open up probably in a similar way. Since the last year they have increased quotas about 50 percent. So they are clearly making steps to move in that direction. The question is how long is it going to take for them to kind of get the rest of the weigh and I wouldn’t be surprise if we see that happen even within the next 6 to 8 months.Sonia: Do you see China continue to outperform market like India and what do you think could be the extent of the fund flows that move into the China A-shares once they get included?
A: Looking at A-share market, we have seen a tremendous run-up over the last year. Shanghai is trading at 20 times earnings; Shenzhen is close to 60 times earnings. So in some sense shares are not undervalued in China any more. So from an institutional investor perspective they might be initially cautious but if they have to track emerging market indexes and China is included - I could see that leading to anywhere from USD 20 billion to USD 50 billion coming into the China market if quotas are relaxed, so a lot of money.
Latha: China is already battling a slowdown internally or at least even mildly encouraging it. If you have this kind of money coming in then there is a problem of Chinese yuan appreciation. Do you think China for separate reasons could go slow on allowing so much of money to come in one shot?
A: I could see them trying to slow things down, little bit control the situation but at the end of the day I think they have more gains in opening market up by bringing in institutional investors would probably stabilise the A-share market to some extent and one of the issues we have is the market driven right now by retail investors who are gambling about things going to happen in the future. So bringing in some special investors could calm things down.
Latha: Do you see over the next 12 months chances of money that would otherwise have come to India go into China, being the more preferred market in many peoples’ pecking order?
A: From investor standpoint investors are still going to be very interested in India and perhaps some may even more interested in India because of the growth story, it is more impressive than China right now.
Sonia: You reckon that USD 20 billion to USD 50 billion that could enter the Chinese market will be a lot of local money, money out of Hong Kong etc or do you think that some amount of money from India could move into China as well?
A: Initially it will be local money as well as some of the major international funds coming out of Europe and US that trying to reallocate their portfolios. Some of that money might be money that was otherwise earmarked for India but probably that would be very small fraction of that capital flow.
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