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Chinese Stocks Dip Following MSCI Inclusion

1 Jun 2018 4:45 am
By Joanne Chiu 

The long-awaited introduction of Chinese shares to a set of widely followed global benchmarks took effect on Friday, but its impact on stock markets was short-lived. China's benchmark Shanghai Composite Index was down 0.5% by midday, following a 1.8% gain the previous day, while Hong Kong's Hang Seng Index was largely flat after Thursday's 1.4% jump.

Friday's Big Theme

Global index provider MSCI Inc. added around 230 mainland-listed Chinese stocks to its flagship Emerging Markets Index, and other indexes, a move expected to draw billions of dollars from investment funds into yuan-denominated stocks.

What's Happening

Many global money managers and institutional investors overseeing funds that track the MSCI indexes adjusted their holdings of stocks in the final minutes of trading Thursday afternoon, ahead of Friday's official change in the benchmarks.

The trading volume of stocks in China's CSI300 Index, which tracks 300 large-cap companies including liquor maker Kweichow Moutai Co. and developer China Vanke Co., rose 13% on Thursday ahead of their inclusion in the MSCI indexes.

In recent days, net fund inflows into China's Shanghai and Shenzhen stock markets via a trading link with Hong Kong logged a noticeable rise, while funds flowing southbound from the mainland into Hong Kong stocks saw negative outflows, partly due to weakness caused by concerns including trade tensions.

One Hong Kong-listed stock jumped as much as 43% Thursday afternoon just before the market closed. Lifestyle International Holdings Ltd., which operates the SOGO chain of department stores in Hong Kong, was added to the MSCI Hong Kong Small Cap Index Friday. Its shares were 28.6% lower Friday morning after the brief spike. The company said it was unaware of any reason for the move besides the index inclusion.

Market Reaction

"The gains in consumption-related stocks yesterday were more or less the market's reaction to the MSCI index inclusion news," said Zhang Gang, senior analyst at Central China Securities. Market participants were expecting foreign fund managers to snap up those stocks after the index inclusion, he added.

Ross Teverson, Head of Strategy, Emerging Markets at Jupiter Asset Management, said his firm isn't making changes to its funds because of the addition of Chinese shares to the MSCI indexes. "We generally find that A-share listed companies are less attractively valued than Hong Kong and US-listed peers," he said, noting his fund holds only two such stocks.

The initial impact of the MSCI inclusion would be small because there aren't many large investors trying to rush into the market, added Adrian Zuercher, head of asset allocations at UBS Global Wealth Management. He noted that "it's still very difficult" for foreign investors to invest in China's markets. That's due to the country's tight capital controls--along with limited investment quotas via the Qualified Foreign Institutional Investor (QFII) scheme and Stock Connect system linking to the Hong Kong market.

Elsewhere

Other Asian stocks were broadly mixed Friday, a day after Italian populists struck a deal on a coalition government and more trade conflicts emerged from a Trump administration plan to impose new tariffs on steel and aluminum imports from Canada, Mexico and the European Union.

Korea's KOSPI stock index rose nearly 1% on the back of a strong rebound in South Korean exports for the month of May, while benchmarks in Japan, Taiwan, Malaysia and Philippines also moved higher. Indexes in Australia and New Zealand were lower.

Shen Hong contributed to this article.

Write to Joanne Chiu at joanne.chiu@wsj.com
 

(END) Dow Jones Newswires

June 01, 2018 00:45 ET (04:45 GMT)

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