Chinese stocks slid on Friday as US tariffs reignited fears of a global trade war, overshadowing China A-shares’ long-awaited inclusion in MSCI’s benchmark market indexes which had been expected to draw a surge of foreign inflows in coming months.
The addition was upstaged overnight after the United States slapped tariffs on metal imports from major allies and several quickly retaliated, days ahead of a third round of trade talks between Washington and Beijing which were already looking rocky.
While fund managers’ strategies are hard to predict, many analysts had forecast inflows of $10 billion around the inclusion, though tepid cross-border flows on Thursday had hinted at a subdued initial reaction.
The Shanghai Composite Index started out flat before ending the morning session down 0.5%, while the benchmark CSI300 dropped 0.8%.
In Hong Kong, the Hang Seng China Enterprises Index, which tracks mainland shares, slipped 0.1%. The blue-chip Hang Seng was off nearly 0.2%.
“There was a lot of media hype around the MSCI inclusion. Now it’s history,” said Wu Kan, head of equity trading at Shanshan Finance.
“Foreign institutional investors are very rational. They won’t just rush into China hot-headed,” he said, adding there were lingering concerns over creditworthiness of some China-listed companies, as well as Sino-US trade relations.
Dealers said major global passive fund managers had already completed portfolio rebalancing on Thursday to avoid any deviations from the global benchmarks starting on Friday, robbing the market of some MSCI opening day momentum.
In addition, some active funds have been gradually raising their investment in Chinese shares over the past two months, anticipating an MSCI-related bounce in prices from June 1.
On Friday, 226 yuan-denominated mainland A-shares were included in MSCI’s emerging markets index for the first time in a step toward deeper integration of China’s bourses with the rest of the world.
Property and infrastructure shares were strong, while banking stocks also rose.
Lynda Zhou, portfolio manager of Fidelity International, said China’s recent crackdown on shadow banking benefits banking stocks by improving visibility of lenders’ assets.
She also prefers leading Chinese consumer companies, which will benefit from China’s rising consumption, improving corporate efficiency, and opportunities in international markets.
The Chinese shares added to MSCI’s emerging markets benchmark have a 2.5% partial inclusion factor. The second phase of the inclusion will take place on Sept. 3, raising the factor to 5%.