Morgan Stanley Capital International (MSCI) has decided to include China’s A-shares in its MSCI Emerging Markets Index (MSCI EM Index), which – together with the firm’s other indices – is often used as a benchmark to measure portfolio performance. The index comprises about 10% of global market caps. MSCI will include 222 A-share stocks, which only accounts for 0.73% of the weighting of the EM Index. But the weighting could increase further over time if China implements more changes in its market reform. The inclusion will take place in two steps, first in May 2018, and second in August 2018. The inclusion could pull more than USD400 billion of funds from asset managers, pension funds and insurers into China’s equity markets over the next decade, according to analysts. An inclusion will automatically result in capital inflows to China’s domestic equity market, as all passive index funds and ETFs that track the MSCI EM index will be forced to add those shares to their portfolios.

The inclusion is a milestone in the opening up of the Chinese equity market to the world. Following reviews in 2014, 2015 and 2016, MSCI had rejected the inclusion, due to the A-shares limited market accessibility to global investors and restrictions on repatriation of capital. The Chinese authority addressed these issues by increasing quotas on foreign ownership of A-shares and relaxing rules on fund remittance. MSCI then raised new worries associated with the widespread, extended trading suspension of many A shares, which took place in China’s 2016 stock market rout. China then responded by changing regulatory rules and limiting trading halts to a maximum of three months, the South China Morning Post.

“International investors have embraced the positive changes in the accessibility of the China A shares market over the last few years and now all conditions are set for MSCI to proceed with the first step of the inclusion,” Remy Briand, MSCI Managing Director and Chairman of the MSCI Index Policy Committee, said in a statement. The MSCI inclusion “will provide a modest boost to sentiment and flows into China,” said David Loevinger, a former China specialist at the U.S. Treasury who is now an analyst at fund manager TCW Group in Los Angeles. “More importantly, it strengthens Chinese reformers that want to open China’s markets. The small index weight looks like a compromise between those asset managers that wanted China in and out.” International money managers can now buy and sell more than 1,400 domestic Chinese stocks after authorities opened the Shenzhen Connect in December, about six months after last year’s MSCI rejection. The first link with Shanghai started in late 2014. China already has the largest position in the MSCI Emerging Markets Index, thanks to Hong Kong-listed stocks and others listed on overseas stock exchanges. “The MSCI inclusion responds to the needs of international investors and shows investors’ confidence in the Chinese economy and financial market. We always welcome this,” said Spokesman Zhang Xiaojun of the China Securities Regulatory Commission (CSRC).

China Eastern Air (CEA) Holding has sold nearly half of its freight subsidiary to four companies in the country’s first mixed-ownership reform in the aviation sector. CEA Holding, the parent company of China Eastern Airlines, signed the deal for Eastern Air Logistics with Legend Holdings, Global Logistic Properties, Deppon Logistics and Greenland Financial. CEA Holding will keep 45% of the freight unit. Legend Holdings will hold 25%, Global Logistic Properties 10%, and courier firm Deppon and Greenland 5% each. Eastern Air Logistics’ core employees will take the remaining 10%. CEA Holding said CNY4.1 billion of state and non-state capital was invested in the cargo unit, which brought its debt ratio down to 75%, from 87.86% at the end of 2016. “Eastern Air Logistics aims to become a world-class air logistics company on par with FedEx, UPS and DHL,” said Liu Shaoyong, Chairman of CEA Holding. China has been conducting mixed-ownership reforms in debt-ridden state-owned enterprises, including bringing in multiple types of investors to central SOEs, exploring flexible and market-based salary systems, and selling shares to SOE employees, the Shanghai Daily reports.

China and the United States have held their first diplomatic and security dialogue in Washington. U.S. Secretary of State Rex Tillerson and Defense Secretary Jim Mattis hosted Chinese State Councilor Yang Jiechi and PLA General Fang Fenghui, Vice Chairman of the Central Military Commission (CMC) for the talks at the State Department. The diplomatic and security dialogue is one of four high-level mechanisms established during the Mar-a-Lago meeting between Chinese President Xi Jinping and U.S. President Donald Trump in Florida in April. The other three are discussions focused on economics, law enforcement and cybersecurity, and social, cultural and people-to-people exchanges. President Xi Jinping looks forward to meeting again with U.S. President Donald Trump during the G20 Summit in Germany in July and welcomes Trump to make a state visit to China this year, State Councilor Yang Jiechi said while meeting President Trump at the White House. Trump said the U.S. hopes to cooperate with China in projects related to the Belt and Road Initiative. Fan Jishe, Researcher of China-U.S. ties at the Chinese Academy of Social Sciences (CASS), said China and the U.S. have maintained “close cooperation” on major issues, and they need timely communication to solve or narrow their differences.

Automotive

• U.S. electric car manufacturer Tesla plans to produce vehicles in China soon at production facilities to be set up in Shanghai’s Lingang Economic Development Zone. According to LMC Automotive Consulting Shanghai, Tesla sold 10,399 cars in China last year, up by 181.7% year-on-year. Assembling vehicles in China would allow the company to avoid a 25% customs tax. Tesla would need to set up a joint venture with at least one local partner. Shanghai-headquartered SAIC Motor would be a natural choice. China sold 507,000 new energy vehicles (NEV) last year, ranking first worldwide. NEV sales in the first five months of this year totaled 136,000, up 7.8% year-on-year. LMC statistics show that 95% of new energy cars sold in China are priced under CNY100,000, while a Tesla S sedan is priced at more than CNY700,000.
• SF Motors, a U.S. subsidiary of Chongqing-based Sokon, has signed an agreement with U.S. heavy vehicle and contract automotive manufacturer AM General (AMG) to buy the latter’s commercial assembly plant in South Bend, Indiana, for USD110 million. AMG is best known for the Hummer, its civilian vehicle, and the Humvee, the military heavyweight. The deal does not impact AMG’s military vehicle assembly plant or its core military vehicle business.

Finance

• Chinese investors are expected to remain conservative as more than 68% of their investments are in defensive assets, according to Legg Mason, a U.S.-based asset management firm. Chinese invested in cash (23.8%), fixed income (27.5%), investment real estate (10.7%) and gold or precious metals (6.4%). “A significant portion of Chinese investors are bullish on domestic assets. Besides local business investment, Chinese investors also believe domestic stocks offer the best opportunities over the next 12 months,” said Freeman Tsang, Director of Business Development at Legg Mason Global Asset Management.
• A gold futures contract based on China’s yuan-backed gold benchmark price is expected to be listed on the Budapest Stock Exchange in Hungary as soon as the second half of this year, according to Jiao Jinpu, Chairman of the Shanghai Gold Exchange (SGE). SGE is considered the world’s largest physical bullion exchange. The yuan-backed benchmark fix, launched by the SGE in April 2016, reflects Beijing’s hopes of reducing its reliance on U.S.-dollar based prices of the metal.
• Credit tightening in China will continue as authorities step up efforts to rein in the shadow banking sector, according to the Bank of America Merrill Lynch (BAML). Shadow banking assets in China grew by 21% in 2016, reaching CNY64.5 trillion, equivalent to 87% of GDP, according to ratings agency Moody’s.
• Renminbi yuan internationalization seemed to have slowed in the past year, but behind the scenes China continues to enhance its financial infrastructure so as to increase global usage of the renminbi. The cross-border use of the Chinese currency decreased significantly in 2016. According to SWIFT, the value of international yuan payments fell by nearly 30%, and the yuan is now the seventh-most active payments currency after it began 2016 in fifth place. The stock of renminbi deposits outside mainland China has been shrinking since the beginning of 2015.
• The Bond Connect trading link is expected to be launched in the near future. China’s rapidly expanding bond market is the world’s third-largest, but foreign participation has been limited: international investors own less than 2% of China’s government bond market, compared to 10% in Japan, over 25% in the UK, and nearly 50% in the U.S. The gradual opening up of China’s bond market will offer abundant opportunities to issuers, investors, and all the intermediaries in between.
• Beijing’s push for structural reforms in the economy appears to have sparked a backlash in the form of companies inflating their profitability. An official audit report said that 18 of the 20 state-owned firms that were audited have in recent years inflated their revenues by more than CNY200 billion and boosted their profits by CNY20 billion with faked business and manipulated books. The companies audited include China National Petroleum Corp (CNPC), China State Shipbuilding Corp (CSSC) and Sinochem Group. Lu Zhengwei, Chief Economist from Industrial Bank, said that the fake profits only accounted for a small proportion of the total at the country’s state-owned entities – less than 2% – but nevertheless showed the problems they had deleveraging.
• People with a poor credit rating will be banned from certain markets or industries, serving in certain positions, or carrying out financial business from October 1. They are also banned from “enjoying certain public policies” or gaining honorary titles. Shanghai is the first city where the credit legislation will be implemented.

Foreign investment

• More sectors are now open for foreign investment in China’s 11 pilot free trade zones (FTZs), ranging from helicopter manufacturing to financial services, the Ministry of Commerce (MOFCOM) announced. All activities conducted by foreign firms in businesses not on the negative list only need to be filed at the relevant Commerce Bureau, rather than being reviewed by the government. The Chinese government on June 16 issued the 2017 negative list for its FTZs, which removes 27 items which were in the 2015 edition, leaving 95 areas off-limits to foreign investors.

Foreign trade

• China has proposed three marine passages connecting Asia with Africa, Oceania, Europe, and beyond in a bid to advance maritime cooperation under the Belt and Road Initiative. They are the China-Indian Ocean-Africa-Mediterranean Sea Blue Economic Passage; the China-Oceania-South Pacific Blue Economic Passage; and one that will lead to Europe via the Arctic Ocean.
• Chinese authorities announced that the nation has lifted a 13-year import ban on some U.S. boneless beef and beef on the bone. It is an achievement of the Sino-U.S. 100-day action plan, which aims to boost bilateral economic ties. The removal of the ban applies to cattle under 30 months old. Beef importers should be registered at the Certification and Accreditation Administration of China, and imported cattle must be traceable to their birth farm. China has banned imports of most U.S. beef since 2003.

Health

• Tsinghua Tongfang Co is planning to acquire a stake in a maker of medical therapies, a deal that has the potential to become the largest-ever investment in a Chinese healthcare company. Tongfang is planning to buy up to 29.9% of Shanghai RAAS Blood Products Co, the two companies said in stock-exchange statements. The stake could be worth more than USD4.4 billion. Shanghai RAAS is specialized in therapies derived from human blood plasma. The Chinese market for blood therapies is expected to grow from USD2.5 billion in 2014 to USD6.2 billion in 2019.

IPR protection

• The Shanghai People’s Procuratorate won the National Public Body Award of the 2017 Global Anti-Counterfeiting Awards from the Global Anti-Counterfeiting Group. The awards ceremony was held in Paris on June 7 – World Anti-Counterfeiting Day.

Macro-economy

• Commercial real estate investment in China will jump 45% to CNY260 billion by 2020 from 2016, property service provider CBRE said. The gateway cities of Beijing and Shanghai, among others, will see a combined 60% of the country’s commercial real estate transaction volume in 2020. Six high-potential cities – Guangzhou, Shenzhen, Chengdu, Chongqing, Tianjin and Wuhan – are forecast to account for 36% of the additional transaction volume, according to the report “Towards 2020: China Investment Strategy.”

Real estate

• Wang Shi, 66, who founded Vanke, the world’s biggest builder of residential homes, said he will step down by the end of June as Chairman of the company, handing the baton to China Vanke’s Chief Executive Yu Liang. The Shenzhen-based developer will hold its annual shareholders meeting on June 30, when 11 candidates will stand for election to Vanke’s Board of Directors. Wang will not be among the candidates.

Retail

• E-commerce firm JD.com reported its sales during the mid-year online shopping festival “6.18” between June 1-18 reached CNY119.9 billion and more than 700 million items have been sold. The transaction volume increased more than 50% compared to the same period last year. The top five items on the shopping list of JD consumers were smartphones, air conditioners, flat-panel televisions, refrigerators and washing machines. Sales of products on Tmall’s supermarket increased 13 times compared with the previous year, while Suning saw its orders more than quadruple from a year ago.
• A house at 110 Repulse Bay Road in Hong Kong, measuring 4,120 square feet, with a price tag of USD87.3 million, is the most expensive in the world per square foot. The luxurious waterfront house has four bedrooms and four bathrooms. It has large windows overlooking the South China Sea, an internal staircase, a master room with a walk-in closet, and extra bedrooms to accommodate two domestic helpers.

Stock markets

• Hong Kong has lost its position as the world’s No 1 destination for companies to raise funds, slipping to the No 3 spot behind New York and Shanghai, amid a dearth of blockbuster listings in the first half, according to Thomson Reuters. The city’s stock market raised USD5.8 billion worth of IPOs from the start of the year to June 23, a drop of 19.5% from USD7.3 billion in the same period in 2016. The New York Stock Exchange (NYSE) leapt into the top spot, raising USD18.2 billion, partly due to Snap’s IPO in March, which raised USD3.9 billion. The Shanghai Stock Exchange (SSE) ranked No 2 globally, having raised USD9.6 billion.

Travel

• China Railway Group plans to build a high-speed railway in Russia connecting the country’s third-largest city Yekaterinburg with Chelyabinsk. The project will involve a total investment of USD2.5 billion, according to a memorandum of understanding (MoU) signed between the Chinese company and Ural Highway during the Fourth China-Russia Exposition held recently in Harbin. Trains are expected to run at a speed of up to 250 kilometers per hour, cutting travel time between the two cities to one hour and 10 minutes from five hours. China’s first overseas high-speed rail project was launched in Indonesia in April. In 2016, the company signed overseas contracts worth a record CNY102.5 billion, up 49.6% year-on-year.
• More than 50,000 foreign visitors to Shanghai have used the option of the 144-hour, visa-free transit policy offered at Pudong International Airport, a 70% rise over the same period last year, when visitors were only granted 72 hours and restricted to flying from Shanghai’s two airports. The visa-free transit policy was introduced on January 30 last year, allowing citizens from 53 countries to stay in Shanghai, Jiangsu and Zhejiang without a visa.
• Chongqing-based Wukong Bicycle is thought to be the first cycle-sharing scheme to shut down amid the boom in the services in China, after about 90% of its cycles went missing, presumed stolen, because the firm had failed to install GPS devices in the bicycles.There are now about two dozen similar firms operating bike-sharing schemes around the country.
• China’s controversial “straddling bus” – the elevated vehicle under which cars can pass – has abruptly come to the end of the road. Workers have begun dismantling the test site for the Transit Elevated Bus (TEB). The widely-hyped vehicle in the city of Qinhuangdao in Hebei province went through trial runs on its 300-meter test track last year from August to October. But less than a year after its debut, the giant vehicle will be moved to a nearby parking lot.
• China put two new bullet train models into operation on June 26 on the Beijing-Shanghai high-speed railway. They will travel at a speed of about 350 kilometers per hour, though their maximum speed is 400 km/h. Compared with bullet trains already in service, the new models feature a longer service life. They can operate 30 years, while the existing ones can be used for 20 years. They also have streamlined designs that allow lower power consumption and more space for each passenger. They are designed to Chinese standards. China now operates 124,000 km of rail lines, including more than 22,000 km of high-speed lines, 60% of the world’s total.

• China Mengniu Dairy has invested more than CNY5 billion in Modern Farming Group Co to manufacture pasteurized milk products and other low-temperature dairy products. Modern Farming is the country’s leading farm company, with the largest number of cattle and a leading provider of raw milk. The company operates 26 farms with 229,200 cows. Mengniu controls about 61.25% of Modern Farming.
• Billionaire Wang Jianlin’s Dalian Wanda Group has rebuked rumors that major state banks have been directed to sell off its bonds. The rebuttal appeared to be confirmed when two executives with Industrial and Commercial Bank of China (ICBC) told the Securities Journal that the bank had not received orders to sell Wanda bonds.
• China has been shifting the focus of wide-ranging bribery investigations to telecommunications, media and technology (TMT) firms as the industry becomes more important to the economy, according to a joint report by the China Institute of Corporate Legal Affairs, Netherlands-based information services provider Wolters Kluwer, and Chinese law firm Fangda Partners.