Key takeaways from China’s 2019 NPC and MSCI’s A-share boost
China wrapped up its annual National People’s Congress (NPC) last week in what was one of most highly anticipated events this year. To help our clients gain a clearer picture of China’s development roadmap, here are the key takeaways from this year’s NPC.
China’s tilt towards pro-growth policies
The NPC1 reaffirmed China’s changing policy stance, with a renewed focus on pro-growth measures. Consistent with our previous expectations, China will holistically employ market liberalisation, RRR and interest rate reductions as well as tax cuts instead of large scale fiscal deficit and quantitative monetary measures that were used in the previous cycle.
Supportive policies in motion
Earlier in the month, China announced a RMB 2 trillion tax/fee cut2 to boost its corporate sector and private consumption. Specific policies were subsequently announced in the NPC, with cuts to both the VAT and social contribution rate commencing on April and May, respectively. The cuts were introduced faster than expected and reflects China’s commitment to quickly put things into motion. Moreover, the announcement showcases a more targeted approach towards monetary loosening policies instead of broad-based liquidity injections.
Addressing foreign investor concerns
The NPC also introduced a new foreign investment law, which specifies that China will not force technology transfer, or restrict investors to repatriate proceeds, or break its promise/contract to foreign investors. The law, which comes into effect in 2020, addresses several outstanding foreign investor concerns and is a positive development that will boost foreign corporate investments over the longer-term.
MSCI’s A-share boost
China’s NPC, however, was not the only piece of attention-grabbing development that had everyone talking. Global index provider MSCI recently announced that it will be increasing the weight of China A-shares in its indices3 – a move that will heavily impact global fund flows given the significance of the MSCI benchmarks. This decision follows an extensive global consultation and we believe is a clear reflection of China’s ongoing efforts to enhance and reform its equity market.
A-share inclusion timetable confirmed
The weighting of A-shares in MSCI indices will increase from 5% factor weight to 20% by the end of 2019. This is estimated to attract approximately US$70 billion4 of flows from funds benchmarked to the indices. Mid-cap stocks will also be included in the indices, which reflect MSCI’s commitment towards having a deeper and wider representation of A-shares.
Positive long-term move and foreign institutional funds to make bigger splash
A-Share inclusion is both a multi-year process and a long-term positive development. We believe this would help expand global investors’ A-share footprint beyond traditional large-cap stocks or consumption-focused sectors. Consequently, A-shares are estimated to make up 10.4% of the MSCI China Index by the end of November 2019, up from its current 2.5% level.
Looking beyond 2019
While MSCI was quick to praise China’s ongoing efforts to open and develop its onshore market, the index provider highlighted a number of constraints that require solving before future weight increases. This includes restrictions on access to hedging and derivatives instruments, short settlement cycle of A-shares, trading holidays of Stock Connect and the availability of an Omnibus trading mechanism. Many of these outstanding issues are well-known by market participants and the relevant authorities. It is therefore a matter of when, not if, further improvements will be made.
1.Source: The National People’s Congress of the People’s Republic of China, 15 March 2019
2. Source: 2019 Government Work Report, 5 March 2019
3. Source: MSCI, 28 February 2019
4. Source: Goldman Sachs, 11 March 2019
The views expressed are the views of Value Partners Hong Kong Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All material has been obtained from sources believed to be reliable as of the date of presentation, but its accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.