BlackRock Offers Vote of Confidence to Mainland China's Stock Markets

By Gregor Stuart Hunter Features Dow Jones Newswires

Big fund managers are for the first time dropping opposition to including domestic Chinese equities in key global indexes, a sign that the mainland's huge stock markets may finally be coming of age.

Continue Reading Below

BlackRock Inc., the world's largest asset manager, said Thursday that it supports including mainland shares in the benchmarks of MSCI Inc., whose indexes are used by global money managers to guide trillions of dollars in investments. Deutsche Asset Management, one of the world's biggest managers of exchange-traded funds, also said that from the ETF perspective there are no more technical problems with including China's domestic equities, known as A-shares, in MSCI indexes.

Other fund managers such as UBS Asset Management, Fidelity International and Matthews Asia, said they think inclusion is becoming more likely.

MSCI, which typically tweaks its indexes each year around June, declined to comment.

Inclusion of A-shares in MSCI indexes could be a watershed for China's $7.82 trillion in domestic equities, the world's second-biggest pool after the U.S. China's markets have slowly opened to foreign investors. In previous years MSCI has said the markets weren't accessible or transparent enough to warrant inclusion of mainland stocks in its benchmarks. Only Chinese companies listed offshore in places such as Hong Kong and New York are included in MSCI indexes.

The inclusion of A-shares would mean that the many global fund managers, including pension funds and insurers, that invest based on MSCI indexes would have to add mainland equities to their portfolios. Funds that compare their performance to that of an MSCI index that included Chinese stocks would likely buy those shares as well.

Continue Reading Below

MSCI's Emerging Markets Index, for instance, is the most widely tracked benchmark of performance of stocks in the developing world and is followed by money managers with $1.6 trillion in assets. Société Générale estimates that inclusion of A-shares in MSCI indexes could immediately lead global funds to buy about $13 billion in Chinese equities, and that amount would rise as more Chinese stocks are included.

Chinese authorities have been lobbying for MSCI inclusion for years, taking steps to fix problems such as unclear ownership laws and curbs on the amount of money foreigners can invest in mainland shares. Two years ago, selected shares on the Shanghai Stock Exchange were opened to foreign investment through a trading link with the Hong Kong market--an improvement over previous rules that permitted only a few handpicked fund managers to buy shares under a quota system. In December, China opened a similar trading link to the Shenzhen Stock Exchange, the country's other major equities market.

One of the major hurdles for China in winning the trust of global investors has been the memory of the 2015 market crash, during which more than a thousand companies suspended trading of their shares--some for months.

Chinese exchanges implemented rules last year that limit the circumstances under which shares can be suspended, while MSCI has pledged it would remove shares from its index if they have been frozen for more than 50 days.

To be sure, many investors remain wary of onshore Chinese markets, where the state invests heavily and regulations are often opaque. Performance of Chinese companies listed in Hong Kong has been much better than those in the mainland this year, and not much money is flowing through the trading links to Shanghai and Shenzhen.

MSCI has also scaled back its China ambitions, trimming the number of mainland shares it proposes to add to 169, a third of what it had suggested in 2016. It also said that Chinese officials have addressed many of its past concerns. The company will make a decision on A-share inclusion this summer after consulting with its clients.

The biggest of those is BlackRock, which manages $5.4 trillion in assets and says it is in favor. Another, Deutsche Asset Management, which manages $746 billion in assets, said the fund no longer sees technical obstacles to including Chinese stocks.

Some hurdles to foreign investment remain, such as different holiday schedules, the lack of a method of determining closing prices in Shanghai and a daily quota for orders through the trading links with Hong Kong, investors say. MSCI is also negotiating with the Shanghai and Shenzhen exchanges over a requirement that they approve any financial products based on their stocks.

The limited number of shares that MSCI is proposing to add this year means the inclusion could be mostly symbolic, said Catherine Yeung, investment director at Fidelity International.

But the more modest proposal is also more likely to succeed, said Geoffrey Wong, head of global emerging-markets equities at UBS Asset Management in Singapore. He said the fund manager isn't lobbying for inclusion but that its clients are looking at the change more favorably.

Andy Rothman, investment strategist at San Francisco-based fund manager Matthews Asia, said the firm is buying more A-shares in anticipation of a inclusion. "From an investor's perspective, you just have to assume that China is going to be included in the not-too-distant future," he said.

Write to Gregor Stuart Hunter at gregor.hunter@wsj.com

(END) Dow Jones Newswires

April 20, 2017 05:24 ET (09:24 GMT)