China’s weight in MSCI’s EM index soars to highest level since November amid sharp rally in stocks

A mind-boggling rally over the last eight days has brought China back to the spotlight in the emerging market pack.

The recent surge has pushed China’s weightage in the MSCI’s benchmark for emerging market equities to 27.8% as of September, its highest level in over 10 months or since November 2023, suggests data compiled by Bloomberg.

China’s benchmark CSI 300 index has leapt nearly 27% in the last eight days, with the index recording its biggest single-day gain in 16 years on Monday, September 30, ahead of the week-long holiday.

The rally, which kicked off with the US Federal Reserve’s rate cut announcement on September 18, got further legs following a stimulus bonanza by the Chinese government. Beijing in an attempt to revive the economy and the stock market announced aggressive measures, ranging from outsised rate cuts to fiscal support.

To support the stock market that was languishing near multi-year lows, the People's Bank of China (PBOC) launched two new tools, one of which is a swap program that makes it easier for funds, insurers, and brokers to access money to buy stocks.

China's central bank also announced that it will instruct banks to reduce mortgage rates for existing home loans before October 31, to support the country’s struggling property market.

According to a Reuters report, global investors are looking to place bets on China again, lured by low valuations and the possibility of a greater stimulus.

Impact on India

Back home, many are worried about renewed interest in Chinese stocks as they believe investors may realign their portfolios towards China as it trades at a more favourable valuation than India.

However, domestic brokerage Kotak Institutional Equities sees a limited impact of the recovery in the Chinese economy and markets on India.

It anticipates that India's exports to China will remain steady, without any significant growth, while imports are expected to continue as usual.

The brokerage suggests that Foreign Portfolio Investment (FPI) flows to India, both active and passive, may moderate depending on the strength of the Chinese market rally. While FPI inflows to India have been robust, active investors might shift some Global Emerging Markets (GEM) funds to China due to its attractive valuations.

However, they don't expect significant selling of Indian holdings for this purpose. Passive inflows from GEM ETFs may also slow down, but changes in relative country weights in benchmark indices would mainly affect new flows from these funds.

(With inputs from Bloomberg & Reuters)

Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.