MSCI Index review spurred record demand for Chinese A-shares

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This week Benjamin Jones, multi-asset strategist, looks at the third and final Morgan Stanley Capital International (MSCI) weighting increase for China A-shares.

“Last week, global index provider MSCI implemented the third and final step to increase the weighting of China A-shares in its benchmark indices. The increase in index weights, 12.1 percent in MSCI China and 4.1 percent in MSCI Emerging Markets, has led to strong demand for China A-shares all year. That has helped domestic stocks outperform offshore H-shares in 2019.

“In addition to this, Stock Connect* saw a rise of 24 billion in ‘northbound’ flows of Chinese Yuan (CNY), i.e. foreign buyers of A-shares; the single largest daily inflow since Stock Connect was established in 2014. As a result, November eclipsed September as the strongest month for northbound flows. A trend which is likely to continue as concerns surrounding the US / China trade wars lessen and confidence in the domestic Chinese economy stabilises.

“The Financial Times Stock Exchange (FTSE) will complete its A-share weighting increase in March 2020, but with MSCI’s weighting changes now complete, demand for A-shares may have peaked and with it, the outperformance of A- over H-shares may be nearing an end.”

*A collaboration between the Hong Kong, Shanghai and Shenzhen Stock Exchanges.

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