MSCI adds Chinese stocks to key benchmarks

Frederick Owens
June 22, 2017

While the current A-Shares inclusion only represents a small weighting in global benchmarks (0.10% of the MSCI ACWI and 0.73% of the MSCI Emerging Markets), we would suggest that investors reassess their positions in regard to country weightings and industry weightings, especially as the different indices continue to adjust their scope of A-Share inclusion.

Luxembourg will be a centre of reference for investors looking to gain access to China's equity markets after the MSCI chose to include China A-Shares into its Emerging Markets Index, according to the Association of the Luxembourg Fund Industry (ALFI).

MSCI will include China's A shares in its Emerging Markets Index starting in June 2018, signaling a large-scale repositioning of some $1.6 trillion in funds tracking the MSCI EM index.

While the announcement of MSCI inclusion is important for China's integration with the global financial system, it will have little initial effect on capital inflow, said Shanghai Stock Exchange's Shi. Partly because of such pressures, all types of foreign investors now own only a little more than 4 per cent of the market.

MSCI estimated the change, which does not happen until June next year, would drive inflows of between $17 billion and $18 billion.

It had ejected inclusions over the past three years, citing concerns including capital controls and listed company abuse of the trading halt rules. "It was anticipated that they will do this, but the weighting is only 73 basis points, so it's quite tiny and does look like a bit of a compromise", said Andrew Clarke, director for trading at Mirabaud Asia, adding it's probable that "there was pressure from China and the U.S." to include A-shares. The MSCI AC Asia ex Japan Index: captures large and mid cap representation across 2 of 3 Developed Markets countries (excluding Japan) and 8 Emerging Markets countries in Asia.

Many individual investors would agree that self confidence can play a major role when investing in the stock market.

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

MSCI's decision has been closely watched as a sign of China's growing importance on worldwide financial markets. "MSCI will reflect a higher representation of China A shares in the MSCI Emerging Markets Index when there is further alignment with worldwide market accessibility standards, sustained accessibility within Stock Connect is proven, and global institutional investors gain further experience in the market".

Many Chinese companies have a dual listing, meaning they appear on both the Shanghai and Hong Kong markets. The A-share market, including shares from Shanghai and Shenzhen markets, is worth roughly $7.5 trillion, the world's largest after the New York Stock Exchange and Nasdaq.

During the consultation, the vast majority of institutional investors approved the proposal to include large-cap shares that are not in trading suspension. This is more than the 169 which had been first proposed in March as part of MSCI's consultation.

MSCI made no promises about increasing the rather low 5% inclusion factor in upcoming reviews.

Capital Economics described it as "a token inclusion", while ANZ Research said "the more progress that Chinese regulators make on liberalisation, the greater the potential for further inclusion".

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