With bulging economic muscle and share prices that just keep rising, fund managers worldwide are gradually starting to take China's stock market seriously: Everyone seems to want a piece of the action.
China's stock market is not just soaring skyward, it is the world's second largest by capitalization. So it was not much of a surprise when Chinese A-shares were added to a 69 billion U.S. dollar emerging markets exchange-traded fund by Vanguard Group, the world's largest provider of mutual funds.
Chinese A-shares will represent 5.6 percent of the index tracked by the fund, Vanguard CEO Bill McNabb said on Tuesday.
"As the first major emerging markets fund to add exposure to China A-shares, the fund will benefit investors with more diversification, deeper emerging market exposure, and greater access to the growth potential of Chinese equities," said McNabb.
TOO BIG TO IGNORE
"As the world's largest and most dynamic emerging securities market, China should be better represented on emerging market indexes," said Qiu Yanying, chief analyst at Vstone Asset Management.
Last month, the FTSE Group included China's A-shares in two new transitional indexes for emerging markets. Another index compiler, MSCI, is considering including the shares in their global benchmarks, with an announcement due next week.
China's A-share market on two bourses in Shanghai and Shenzhen is home to more than 2,700 companies, with a combined value of about 67.5 trillion yuan (11 trillion U.S. dollars). Combined daily trading volume on the two exchanges exceeded 2 trillion yuan on Wednesday.
The Shanghai Composite Index has climbed more than 50 percent this year, the most among all global benchmark indices, while Shenzhen has more than doubled, driven by a vibrant technology sector.
A-shares traded in China were only available to foreign investors via two quota systems -- the 2003 Qualified Foreign Institutional Investor (QFII) and 2011's Renminbi Qualified Foreign Institutional Investor (RQFII) -- until last year when the Shanghai-Hong Kong Stock Connect program was launched. A similar Shenzhen-Hong Kong scheme will join the party later this year.
"With China keen to internationalize its A-share market, QFII quotas will be expanded sooner rather than later," said Wang Sheng, an analyst at Shenwan Hongyuan Securities. Overseas institutions have received quotas amounting to 437 billion yuan through the two systems. When quotas are expanded, the Hushen 300 index, tracking heavyweight stocks in Shanghai and Shenzhen, is expected to be a hot destination for foreign money.
Looking set to continue, at least for a while, China's bull market is well supported by the accumulation of capital in the country. Investors will therefore be watching the MSCI decision very carefully. If the decision goes China's way, billions more dollars of foreign capital could flow into the A-share market. It would be naive to assume all that hot money will come flooding in without a cost.
The stock market fluctuated sharply on Thursday with the Shanghai Composite Index plunging more than 5 percent before trimming losses and closing 0.76 percent up on the day at 4,947.10. On May 28, the index dived 6.5 percent after closing at a seven-year high the previous day.
Strap yourself in and get ready for a bumpy ride, because in a market where nothing is ever certain, the arrival of a vast tide of foreign capital will mean choppy waters ahead.
