MSCI lists 234 Chinese stocks for index inclusion in boost to capital markets

SHANGHAI (Reuters) - MSCI, the U.S. index publisher, said on Tuesday it will include 234 Chinese large cap stocks in its global and regional indexes on June 1, setting the stage for capital markets in the world's second-biggest economy to get a boost from a potential surge of foreign money.

In a quarterly review, MSCI ejected nine companies and added 11 from the proposed MSCI China A Inclusion Index, slightly altering the expected weighting that the Chinese stocks will have in MSCI's emerging market index. It did not explain why some companies were added or removed.

The 234 yuan-denominated stocks, or China A-shares, will represent an aggregate weight of 0.39 percent in the MSCI Emerging Markets Index <.MSCIEF> at a 2.5 percent partial inclusion factor during the first step of the China entry. The second phase of the entry will take place in September, which will double A-shares' aggregate weight to 0.78 percent.

The long-awaited inclusion of Chinese stocks in MSCI's indexes next month is expected to draw increased foreign capital into China's markets, where foreign ownership now amounts to about 2 percent.

The inclusion "sends a message that global investors can’t afford to ignore onshore China equities anymore", Howard Wang, Head of Greater China Equities at J.P. Morgan Asset Management, wrote in a note.

The U.S. asset manager expects that in the next five years, China A-shares' weighting in the MSCI EM index could rise to 9 percent, bringing in about $230 billion of index flows.

For an MSCI inclusion explainer, click

The top five companies added to the China A Inclusion Index on Tuesday by market cap were Shanghai Electric Group, Zhangzhou Pientzehuang Pharmaceutical Ltd Heilan Home Co Ltd, Zhejiang Century Huatong Group Co and Perfect World Co Ltd.

Shanghai Electric shares rose some 4 percent on Tuesday after the news, while Heilan Home gained 2.4 percent.

The top five companies deleted from an earlier draft of the list, also by market cap, were Shanghai Lujiazui Finance & Trade Zone Development Co, Jiangsu Bicon Pharmaceutical, Pacific Securities Co, Cosco Shipping Energy Transportation Co and Guizhou Group Pharmaceutical Co.

Lujiazui Finance & Trade, Pacific Securities and Cosco Shipping Energy fell around 1 percent each on Tuesday.

The overall market bounced around but ended higher. The Shanghai Composite Index <.SSEC> was up 0.58 percent and the CSI 300 index <.CSI300> rose 0.38 percent.

The MSCI China A Inclusion Index is heavily weighted toward financials, consumer, and real estate.

The firms include China's biggest lenders such as the Industrial and Commercial Bank of China, Bank of China and China Construction Bank, the country's top consumer brands Kweichow Moutai and Qingdao Haier, as well as China's major metal producers including Baoshan Iron & Steel.

Telecommunications equipment maker ZTE Corp, which has been buffeted by trade frictions between China and the United States, remained on the list and will be among those included.

LIQUIDITY BOOST

Although much of the impact has been priced in already, the imminent China MSCI entry has rekindled interest in Chinese blue-chips recently.

Raymond Ma, portfolio manager at Fidelity International said he believed the inclusion of A-shares in the MSCI indices would help the A-share market to become more sophisticated, improve liquidity and be driven by fundamentals rather than speculative factors.

"I am most constructive on consumer, information technology and industrials sectors after the MSCI inclusion," he said.

"Thanks to ongoing consumption and industrial upgrading in China, these sectors are likely to deliver sustainable and solid growth in the next three to five years. We expect them to outperform in the medium to long term."

Over the past two months, Chinese mutual fund houses have raised over 10 billion yuan through a dozen newly-launched funds that track MSCI's A-share indexes, while April's foreign inflows via the Shanghai-Hong Kong stock connect hit a monthly record.

MSCI said last June that Chinese stocks could initially represent a 0.73 percent weighting in the MSCI EM Index at a 5 percent partial inclusion factor, with the inclusion to be completed in a two-stage process, on June 1, and on September 3.

MSCI's latest announcement means the China A-share weighting would rise slightly to roughly 0.78 percent.

Irmak Surenkok, portfolio specialist at T. Rowe Price, said that foreign investor participation in A-shares increased by about 30 percent since MSCI's China inclusion announcement last year.

However their share was still modest at little over 2 percent, compared with nearly 40 percent foreign participation in other Asian markets such as Taiwan and Korea, he said.

"While many investors focus on top-down indicators such as GDP growth or the debt burden, in our view, it is the underlying bottom-up opportunities that illustrate how compelling and still under-appreciated the China investment story is."

Darwin Hung, index analyst at Instinet Pacific Ltd, said that investors don't expect MSCI to accelerate the inclusion of A-shares in the short-term.

However, "everyone will still be interested to know when MSCI will expand the list to include midcap and non-Stock Connect stocks as that would greatly increase the weighting of A-shares in its Emerging Market Index," he said.

(Additional reporting by Rodrigo Campos and Trevor Hunnicut in New York; editing by Richard Pullin, John Ruwitch & Shri Navaratnam)

By Samuel Shen and Brenda Goh