World Economy

$1.7t Locked Out of China Stock Rally

$1.7t Locked Out of China Stock Rally$1.7t Locked Out of China Stock Rally

China’s push to insert its stock market into the global financial system is coming too late for investors holding $1.7 trillion of developing-nation assets.

The benchmark gauge in China has soared 33 percent since August through last week, more than any other major market in the world, yet most developing-nation equity funds aren’t benefiting from the rally at all. In fact they’re plunging, Bloomberg reported.

The problem is that while Chinese policy makers have taken some steps to free up capital flows, the moves haven’t gone far enough to persuade MSCI Inc. to include the country’s locally traded shares in its flagship emerging markets index. And if a market isn’t in the index, fund managers who benchmark their performance to the gauge typically won’t put money into it.

With Chinese stocks listed in Hong Kong failing in their role as substitutes, Brazilian shares falling into a bear market last week and Russian stocks tumbling, not since 2010 has the lack of mainland China securities been felt so keenly by investors.


“This recent market rally has really been only local shares in China, and most of the funds, most of the ETFs out there, their Chinese exposure is mostly overseas listed companies,” Stephen Tu, an analyst at Moody’s Investors Service in New York, said by phone Dec. 12.

“No matter how you measure it, China’s economic presence in the world is far greater than the public securities exposure that global investors have of China within their portfolios.”

Oppenheimer Funds Inc.’s $39 billion Developing Markets Fund is down 16 percent since August, while BlackRock Inc.’s $34 billion iShares MSCI Emerging Markets ETF has lost 15 percent, in line with the gauge it tracks, according to data compiled by Bloomberg.

To make matters worse, asset managers are also failing to take advantage of last month’s Shanghai-Hong Kong bourse link, which allows foreigners to buy a net 13 billion yuan ($2.1 billion) of onshore shares each day.

Daily orders have averaged just a quarter of the allowable limit since the connect program’s inception, in part because mainland stocks now trade at a 14 percent premium to their Hong Kong equivalents, compared to a discount of more than 10 percent as recently as July.