Foreign investors snap up blue chips

Shanghai, Shenzhen benefit via HK links ahead of MSCI index revamp

Overseas investors are snapping up Chinese bluechip A shares in the run-up to the reconstitution of Morgan Stanley Capital International's emerging markets index.

They bought a record 3.98 billion yuan ($631 million) worth of stocks listed on the Shanghai Stock Exchange through the Shanghai-Hong Kong Stock Connect on April 18 alone, according to data from Wind Info, a Shanghai-based financial information provider.

On the same day, overseas investors bought a record 3.24 billion yuan worth of shares of Shenzhen-listed companies, using the Shenzhen-Hong Kong Stock Connect.

In both Shanghai and Shenzhen, overseas investments were focused on shares of finance and Chinese liquor companies.

On April 19, the two markets attracted a further 5.3 billion yuan from overseas investors.

Analysts from Beijing-based China International Capital Corporation Limited, or CICC, wrote in a note that the northbound investment - funds coming from Hong Kong into the Chinese mainland bourses - has mainly targeted blue-chip A shares since March-end.

Wang Hanfeng, chief strategist at CICC, attributed the northbound investment to overseas investors' confidence in the long-term performance of the blue-chip companies, given their current share prices.

"As the day of the inclusion of A shares in the MSCI index is approaching, some over-seas funds have started mapping in the A-share market," he said.

What's more, overseas investors are more optimistic than Chinese investors, said Wang. By comparing the performance and market capitalization of the A-share companies and other international companies included in the MSCI emerging markets index, overseas investors believe that the A-share market is more attractive, especially after the fluctuation earlier this year.

"Based on the past experience, (you could say) overseas investors have always seized the right timing to invest in blue-chip companies," he said.

Agreed Yang Deliang, chief investment consultant at Shenzhen-based Essence Securities. The imminent inclusion of A shares in the MSCI index has grown into a catalyst for the rebound of blue-chip companies, he said.

"Investment in the Chinese market only takes up 3 percent of the international institutions' global asset allocation on average, which is inconsistent with the economic size of China. As the blue-chip companies' share prices have reached a reasonable level, they will be more attractive to overseas investors, in terms of their market cap and competitiveness," he said.

MSCI is scheduled to announce on May 14 initial details about how it will reconstitute its emerging markets index. The revamped index will take effect from June 1.

The second phase of the revamp will be announced on Aug 13, and will take effect on Sept 3.

Some 232 A shares will be included in the MSCI emerging markets index, with those of finance, property, food and beverage, and healthcare companies making up the majority.

CICC estimates that the initial weighting of the A-share market in the MSCI global index will likely be around 0.8 percent.

The A-share market is expected to attract overseas capital inflows of $21.2 billion by August.

Based on similar market opening-up in the Republic of Korea, the annual overseas capital inflow into the A-share market is estimated to reach up to 400 billion yuan in the next five to 10 years.