China’s Entry into MSCI EM Index to Lead Huge Money Flowing Out from Seoul Bourse

According to Nomura Securities, Chinese domestic-listed A shares are expected to attract global funds amounting to US$17.6 billion for a year to come once they are included in the MSCI EM Index. It added that the South Korean stock market is likely to lose US$2.561 billion in that case.

These calculations are based on an amount of US$1.6 trillion that is a combination of passive funds following the emerging market index and active funds focusing on specific investment targets. Instinet is currently estimating the size of the passive funds at US$113 billion.

In the meantime, MSCI is planning to release its market classification report for this year on June 15. The report covers whether to include A shares in the emerging market index.

Nomura Securities explained that A shares are likely to account for 1.1% of the MSCI EM Index in May 2017 on the assumption of an initial inclusion factor of 5%. According to it, money inflow from passive funds is estimated at US$1.243 billion and that from both active and passive is estimated at US$17.6 billion.

Meanwhile, South Korea’s presence in the MSCI EM Index is forecast to fall from 14.55% to 14.39% with US$181 million flowing out from passive and the total outflow reaching US$2.561 billion. Likewise, outflows from the Taiwanese and Indian stock markets are estimated at US$2.1 billion and US$1.5 billion, respectively.

Undoubtedly, A shares’ inclusion in the index is welcome news for the Chinese stock market. Still, some experts point out that its actual impact on capital flows may be limited at best in that the initial inclusion factor is no more than 5% and the estimated inflow of US$17.6 billion is much short of China’s capital outflow. Last year, Chinese enterprises kept US$639 billion in U.S. dollar and their foreign currency loans amounted to US$167 billion. The errors and omissions account alone recorded US$188 billion in deficit, more than 10 times the estimated inflow.