MCSI to include China A shares in emerging markets index

The decision has “broad support from international institutional investors” that it consulted, MSCI says in its announcement.

The move to add Chinese equities follows from the implementation of the Stock Connect program to facilitate trading between Hong Kong and mainland China, which has opened up access to shares of Chinese companies. Additionally, local Chinese stock exchanges has relaxed certain requirements that can restrict the creation of index-linked investment vehicles globally, MSCI notes.

“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.” says Remy Briand, managing director of MSCI and chairman of the MSCI index policy committee, in a statement. “The expansion of Stock Connect has been a game changer for the market opening of China A shares.”

MSCI plans to add 222 China A large cap stocks to its emerging markets index. It will use two-step process to add the shares, in order to adhere to the existing daily trading limits on Stock Connect. It will also start to calculate a number of provisional indexes that include China A shares to help investors manage the implementation.

“When further alignment with international market accessibility standards occurs, sustained accessibility is proven within Stock Connect and international institutional investors gain further experience in the market, MSCI will reflect a higher representation of China A shares in the MSCI Emerging Markets Index. MSCI is very hopeful that the momentum of positive change witnessed in China over the past years will continue to accelerate,” adds Briand.

MSCI’s decision is positive for inflows into Chinese equity markets, and into passive funds and managers involved in cross-border products, such as BlackRock, Inc. Vanguard Group, Inc. and Invesco Ltd, according to a report from credit rating agency Moody’s Investors Services.

“The inclusion of A-shares by MSCI is significant because it marks the first time that Chinese stocks will be included in the key benchmark index, and paves the way for global capital inflows into China’s A-shares, by linking the stocks to the most dominant trend in asset management: the increasing adoption of low-cost passive index funds,” says Nino Siu, vice president and senior analyst at Moody’s, in a statement.

The partial inclusion of A-shares will start with an approximately 0.73% weighting of these shares in the MSCI EM Index, the Moody’s report notes, which translates to about US$11 billion of inflows into China’s onshore markets from funds benchmarked to that index.

“China has the second-largest domestic equity market globally by market capitalization, so the inclusion of A-shares in the MSCI EM Index will allow funds to better satisfy investor demand for a broad-based index exposure to China’s economy, and enable investors to build additional strategies using the domestic Chinese market,” adds Stephen Tu, vice president and senior analyst at Moody’s.