MSCI adds China-listed stocks to index in long awaited move

Yolanda Curtis
June 22, 2017

An investor looks at a screen showing stock information at a brokerage house in Shanghai, China November 9, 2016.

Bill Maldonado, CIO for Asia Pacific at HSBC Global Asset Management, said the inclusion of China A-Shares by MSCI is part of a growing shift in the global economy and reflects the policy of the Chinese government.

MSCI also said it would consult on adding Saudi Arabia to the emerging markets benchmark and that Nigeria will remain a frontier market, but it shocked many emerging market investors by declining to upgrade Argentina from the frontier market category.

"This decision has broad support from worldwide institutional investors with whom MSCI consulted, primarily as a result of the positive impact on the accessibility of the China A market", MSCI said in a statement.

The blue-chip CSI300 index shook off a bout of early profit taking to end up 1.2 per cent at 3,587.96 points, its highest close since December 31, 2015.

Only 222 stocks are being included and, with a weighing of just 5 percent, they will account for only 0.73 percent of the Emerging Markets Index .MSCIEF . The company said the Chinese representation in the index could be increased in time if China enacts additional reforms. Currently, foreign investors own less than 1.5 percent of China A shares, which are traded on the Shanghai and Shenzhen bourses.

A US-based firm is to announce Wednesday whether it will finally include Chinese shares in a key global stock index after three previous rejections.

The stocks, which would represent a weighting of just 0.73 percent in the benchmark, will be included via a two-phase process in May and August next year.

MSCI says its emerging markets index is tracked by more than $1.5 trillion in assets.

This inclusion brings A-Shares deeper into the global investment arena, and we urge investors to make an effort to understand the fundamentals of investing in China A-Shares, which are slated to grow in importance in global benchmarks.

But Hirn stressed that MSCI's decision to include Chinese shares confirmed "gravitational importance of China A-shares". "They (Chinese officials) took them very seriously and acted upon some of them", MSCI chief executive Henry Fernandez told CNBC. "It's very hard for us to articulate any type of timeline with respect to further inclusion", Lieblich told reporters.

It is now hard to gauge whether China's A-shares will adapt to global best practices, but analysts are confident of long-term benefits of the MSCI inclusion.

MSCI may revise the implementation road map to a single phase if the daily limit on Stock Connect trading were to be abolished or significantly expanded before the scheduled inclusion dates.

To avoid an inscrutable market, active funds that tend to track MSCI indices can opt not to include A shares in their portfolios, as its small index weight is unlikely to sway performance.

The commodity and bond market turbulence and falls in Europe pushed MSCI's all-country share index down 0.2 percent after its 0.7-percent slide on Tuesday compounded by a weak close on Wall Street. "The expansion of Stock Connect has been a game changer for the market opening of China A shares".

Presumably, as China has a substantial domestic market, and consumption now contributes half of the country's economic growth, slowing global trade will likely affect other emerging markets more. They also welcome the decrease in the number of suspended China A shares, but still consider the number high, compared with other markets.

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