Chinese A-share inclusion in MSCI – Risk for Indian Markets

Chinese equity markets have caught investor’s attention worldwide.  If you’re not already paying attention to China, you should start now.

Chinese equity trading occurs on two separate markets: A-shares that trade on the Shanghai Composite (local) and H-shares that trade on Hong Kong’s Hang Seng Index (foreign). Performance of these markets over the past 12 months speaks for itself. Soon US Index provider MSCI is expected to include these Chinese A-shares in its emerging market index. The decision for inclusion has been delayed till the outstanding market accessibility issues are resolved as per comments made by Remy Briand – MSCI Managing Director and Global Head of Research.

In past 1 month alone the Shanghai Composite Index has delivered 21.58 percent. Performance was consistent for three months period. For past three months, the Chinese index has delivered 54.84 percent. If one has a look at the index’s performance for last one year, it stands at 152 per cent. Any investor will crave for such returns where his/her money has more than doubled in a single year. Year to date the performance has been 58 per cent.

Should investors in Indian equity markets be worried of what is happening in Chinese equity markets?

Even though the Chinese equity markets have given such phenomenal returns and lot of global investors may be willing to invest in markets for long term, experts believe the markets are overheated and are in bubble zone.

Aggressive interest rate cuts are promoted by the People’s Bank of China. According to Institute of International Finance (a club of global banks) Chinese retail investors have increased their equity investment via margin borrowing by almost 85 per cent this year to a record USD 400 billion.

It is indeed unusual and any rational global investor, it is a warning signal.Until now the possibility of a Chinese bubble deflating was of little concern in the Global markets. Bubbles were financed by domestic saving. That is now beginning to change. There is risk of contagion effect as more liberalisation is taking place in china. In short, China and the developed world are set to become more uncomfortable financial bedfellows.This may affect Indian equity as well due to contagion. Also with Chinese A-share if included in MSCI emerging markets would mean an increase allocation in chinese equity. This may reduce investments in other emerging markets like India, from which an outflow of 3 billion USD is expected by experts.

Investors start tracking Chinese equity markets and development it may help your investments!!