China stocks slip ahead of MSCI decision, liquidity concerns linger

China stocks slip ahead of MSCI decision, liquidity concerns linger

The Shanghai Composite Index gained 0.68 percent to 3,144.37 points.

Northbound trading under the mainland-Hong Kong stock connect schemes has averaged a net inflow of 1.21 billion yuan ($177.15 million) per day in the last two weeks, more than the 938 million yuan in the first five months of the year, as investors have built in high expectations of the inclusion.

“The inclusion could bring about 60.7 billion yuan into the (A-share) market, but the impact would be limited if the inclusion does not happen”, Haitong Securities wrote. Net inflows so far this month have reached almost 15 billion yuan.

“While the stock connect programs will provide worldwide investors direct access to most companies traded in the Chinese mainland, the bond connect program can enhance the liquidity and pricing efficiency of Chinese bonds in the market”, said Ulrich.

A big test for the Australian stockmarket and the Australian dollar early Wednesday, Sydney time (and for other markets and currencies) when MSCI faces yet another decision on whether to include some of China’s major companies in one of its key global indexes.

She said there are a range of blue chip stocks in the A-share market, representing well-established business models with strong pricing power and robust cash flows in Shanghai and Shenzhen bourses. The newly adopted methodology is created to address these issues and make inclusion more likely, analysts said.

The securities regulator said it would be happy for MSCI index inclusion, but Chinese capital market reform will not be derailed without the inclusion.

By opening up the mainland market through the Shanghai-Hong Kong Stock Connect in 2014 and the Shenzhen-Hong Kong Stock Connect previous year, the central government has gradually eased capital restrictions and investment quotas.

Morgan Stanley sees a more than 50 percent chance of a “Yes” decision, expecting a 0.5-1 percent rise in the Shanghai Composite Index on a positive result, although it noted that actual implementation would not take place until June 2018.

If a deal is finally hammered out, A-shares would account for just 0.5 percent of the MSCI Emerging Markets Index.

Asset managers have noted that inclusion in the index after the three previous rejections is likely this time, with the weight of money flowing into Chinese A shares evidence of that conviction.

Total turnover of stocks in the two indices shrank by 3.4 percent to 351 billion yuan (51.6 billion USA dollars) from the previous trading day.

Shenzhen-listed Chinese home appliance maker Midea Group Co – potentially a heavyweight in the EMI – has witnessed a surge in foreign interest since MSCI in March unveiled its new methodology for China inclusion.