Korea feels the China squeeze in MSCI index

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Korea feels the China squeeze in MSCI index

MSCI said Wednesday it was adding Chinese stocks to its emerging markets index - and China’s gain was Korea’s loss.

The closely followed U.S. index said it will include 5 percent of China’s 222 large-cap stocks in its Emerging Market Index starting next year, which will reduce the weights of stocks from economies already on it, including Korea. As a result, Korea’s main Kospi index slipped 0.49 percent to 2,357.53 on Wednesday while the junior market Kosdaq dropped 0.54 percent to 665.77.

Jeong Eun-bo, vice chairman of the Financial Services Commission, said the change could lead to capital outflows from Korea of up to 4.3 trillion won ($3.8 billion).

The Korean component of the emerging markets index will be reduced by 0.23 percentage points to 15.27 percent.

“We expect a potential outflow of about 600 billion won to 4.3 trillion won,” Jeong said.

But Jeong said no major impact or serious damage was expected by the FSC.

“The A shares inclusion was widely expected from the beginning of this year,” he said.

“There is little chance of a drastic exodus of foreign capital, given the net inflows of foreign investment and the growth rate of global funds.”

An estimated $1.6 trillion in assets around the world were benchmarked to the MSCI Emerging Markets Index as of the end of June 2016.

Some analysts said the real trouble will come when 100 percent of Chinese A stocks are included.

Cho Yeon-joo, a researcher at NH Investment & Securities, projected an outflow of $30.8 billion from Korea ultimately.

“In the case of the 100 percent addition, China’s portion of the index will rise to 12.8 percent, squeezing out 2 percent of Korea’s share.”

The FSC said it will take years for the full inclusion, citing the cases of Korea and Taiwan.

Other analysts said the changes would not deal a huge blow to the country’s stock markets.

“It’s true that the decision is a negative factor for local stock markets,” said Koh Seung-hee at Mirae Asset Daewoo. “But the fundamentals of the stock markets remain strong and it is unlikely that the change would have a big impact.”

MSCI suggested that the changes will take place gradually, suggesting a 10 year timeframe.

It took six years for Korea and nine years for Taiwan to have a full presence in the MSCI Emerging Markets Index.


BY PARK EUN-JEE [park.eunjee@joongang.co.kr]
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