MSCI will include Chinese mainland-listed equities, known as A-shares, in its widely followed Emerging Markets index for the first time.
The index provider says it will add 222 large-cap Chinese A-share stocks to the index beginning in June 2018. The stocks will represent 5% of the A-share market and 0.73% of the index's total weight.
“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,” said Remy Briand, managing director at MSCI.
Prior to the announcement, some fund managers argued the significance of the inclusion would be mainly symbolic.
“It will probably lead to around $5-15 billion of flows automatically into A-shares from passive funds tracking MSCI's Emerging Markets index,” said Nick Yeo, head of Chinese and Hong Kong equities at Aberdeen Asset Management. “That's nothing when you consider that the market capitalisation of China's onshore exchanges is $7 trillion.”
Detlef Glow, head of EMEA research at Thomson Reuters Lipper, said that even if every emerging market equity fund on his firm's database increased its allocation to A-shares to 5%, the overall inflow would only be about $42 billion. He said an inflow of this size was unlikely because many funds are actively managed and are not obliged to mirror the Emerging Markets index.
Nevertheless Glow said the inclusion of A-shares would “mark a milestone for the credibility of Chinese A-shares and therefore may lead to further development of the Chinese domestic stock market, attracting new international investors and increasing the overall liquidity of the market”.
Although managers of Chinese equity funds are generally cheering the inclusion, some underlined the hazards connected to the asset class.
“There are some risks to the index inclusion,” said David Raper, Asia ex Japan portfolio manager at Comgest, who noted that MSCI previously excluded A-shares from the Emerging Markets index because of concerns on capital mobility as well as the high level of share suspensions. However he predicted that these risks would decline over time.
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