Sheer weight of money has both good and bad effects. Late on Tuesday MSCI, the benchmark setter, said it will not yet include China’s onshore A-shares in its emerging markets benchmark. On Wednesday A-shares shrugged, opening down one per cent and rallying into positive territory.
That is a healthy response to a liquidity non-event. The inflow to buy A-shares up to the proposed first phase weighting would have been as little as $15bn, according to Goldman Sachs. At less than a day’s volume this would not have moved the market. Of course, the decision is a blow to China bulls, but the avoidance of a rally based solely on sentiment is ultimately a good thing.
True, rising share prices might have given China options — the ability to convert debt to equity, raise funds from government stake sales and restructure the balance sheet. Yet such strategies circumvent harder decisions. In this instance, no weight of money will produce the best outcomes of all.