The weighting of Chinese stocks increases in the Tech Stocks Bonanza

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Chinese stock markets on Friday welcomed the announcement that MSCI, a leading emerging markets index specialist, will increase the weighting of Chinese stocks ("A" shares) in their indices. This represents a major victory for China, which wants to continue modernizing its economy and increasing its importance on the global financial scene. It could generate up to $ 125 billion in additional investments in Chinese stock markets over the next few years. while MSCI increases its weighting in Chinese A shares from 5% to 20%.

The ChiNext Chinese Board of Directors should also register additional entries. The Chinese equivalent of Nasdaq, aimed at businesses and technology start-ups, is also expected to benefit from inclusion in the MSCI indices in 2019. Further boosted by the postponement of US tariffs on China at a date still indeterminate, it seems that the search for a possible destabilization of tensions between the United States and China in light of Chinese concessions on the valuation of the yuan and commitments to increase agricultural imports.

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What does it mean for those of us who love everything about technology? Easier access to financial markets for Chinese firms probably means better ability to raise capital and produce better technology products. However, if the yuan is actually allowed to appreciate against the dollar, it will push China to import more and make Chinese products more expensive for export. Although the overall cost of Chinese assembly in many technology products is only a relatively small part of the final final cost of technology products, inflation in any part of the value chain will naturally result an increase in costs for end consumers.

Indices as engines of finance

For those who do not know, inclusion in the indexes can be a determining factor in stock prices, particularly because of the rise of tracking funds that seek to mimic "market" returns. are usually compared to an important index. Investors who decide not to pay an active fund manager to choose stocks and sectors while many of these fund managers do not regularly outperform the main index of their market see the additional costs of a fund manager. active fund: the anathema and so often piling their money in tracking funds that take essentially the same weights and actions as those that make up the index. No expensive fund manager is needed and the returns will be in line with the index itself.

This means that when an index changes in component or weight, large capital inflows or outflows can become commonplace as funds seek to reposition themselves to continue to mimic the index that they are supposed to return to their investor. as MSCI says to Chinese equities, the weighting of 5% to 20% during this year is a big change.

China has faced a number of hurdles (though it is the second largest economy in the world at the moment) for its financial markets to support this type of victories. These include mainly the very strict capital controls imposed on foreign investors and the lack of easy access of foreigners to Chinese markets. Hong Kong is of course an exception in view of its historic British regime and its market is generally aligned with Western business practices, but Hong Kong has long been closed to Chinese mainland companies seeking access to capital markets, leaving the main stock exchanges China's only recourse.

This, however, posed additional challenges as foreign institutional funds were relatively uninvested by major Chinese markets due to difficulties in access and the lack of traditional hedging instruments. such as derivatives. could not invest in them to the extent that they would otherwise. The lack of large institutional investors has also resulted in a fairly dynamic and sentiment-driven financial climate, less focused on corporate fundamentals and more on the latest news that leads private investors to buy or sell, which has contributed to the high volatility associated with Chinese capital markets.

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Final note – Be careful to maintain

As we have written in the past, China remains a slightly dangerous proposition from the point of view of investment. China's growth in recent years has been driven by debt, and in some respects is continuing, particularly as the People's Bank of China has relaxed the matching requirements twice. own funds of the country's banks. That's the kind of smoke and mirrors used when the rides are slowing down and the government wants things to go a little longer.

Any major stress in the global economy could exacerbate the debt chasm that is likely to exist in the Chinese economy and this kind of fuss over critical measures would be exposed in the light of the economic downturn.

Despite the strength of the US, the US economy is also showing signs of underlying difficulties, including an increasing number of auto loans, Fed withdrawals on the balance sheet, tighter monetary unemployment data slightly lower than expected.

The discussion on an agreement between the United States and China is increasingly important for both parties. It should be remembered that we are at the heart of one of the biggest rising markets of the last century (11 years old and over), although the underlying economic realities in terms of real wage growth have not materialized in the past. The economy has recovered from the point of view of the financial markets.

Greater exposure of investors to a Chinese economy that may or may not be on the brink of an over-indebted collapse can generate better gains for investors if the music continues to play, but it seems rather late in the economic cycle to make significant strategic bids on emerging markets.