MSCI to rule on China A-Shares inclusion

Jun 13th, 2017 | By | Category: Equities

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In a much-anticipated announcement, index provider MSCI is to reveal on 20 June 2017 whether it will include China A-shares in its mainstream MSCI Global Investable Market Indexes family. According to market commentators, the odds appear titled towards inclusion.

MSCI to rule on China A-share inclusion on 20 June

A-shares are yuan-denominated securities of Chinese incorporated companies that trade on either the Shanghai or Shenzhen stock exchanges.

A-shares are Renminbi-denominated securities of Chinese incorporated companies that trade on either the Shanghai or Shenzhen stock exchanges. They can only be traded by residents of the People’s Republic of China or by foreign investors via an official quota scheme such as the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) programmes.

Currently, China’s involvement in MSCI’s mainstream indices has been limited to Hong Kong-listed H-shares and Red chips.

A verdict in favour of inclusion may see China A-shares increase in value as several large mutual funds and ETFs tracking MSCI indices, and particularly the MSCI Emerging Markets Index, become required to buy these stocks to align their portfolios with the updated index constitution. Such funds include the $32bn iShares MSCI Emerging Markets ETF (NYSE Arca: EEM) and the $32bn iShares Core MSCI Emerging Markets ETF (NYSE Arca: IEMG).

In June 2016, MSCI announced for the third consecutive year that it would not include China A-Shares into its indices, saying that more needed to be done to open up the country’s tightly controlled market.

In particular, the index firm cited three remaining obstacles that needed to be addressed. These were an effective implementation of the QFII policy changes and removal of the 20% monthly repatriation limit; an effective implementation of new trading suspension treatment; and resolution of pre-approval requirements by the local exchanges on launching financial products.

Market commentators this year are more optimistic about approval being granted, noting that whilst the 20% QFII repatriation restriction remains unchanged, there has been significant positive developments including the introduction of the Shenzhen Stock Connect Programme in December 2016.

Together with the Shanghai Stock Connect, the two programmes offer investors access to over 1,400 Shanghai and Shenzhen stocks without needing to apply for a license and quota.

Additionally, MSCI has relaxed its previous standard of evaluation in favour of a less rigorous and more gradualist approach. Under the newly proposed system, MSCI may choose to include fewer stocks initially, sourced under simpler institutional arrangements than those offered in previous years.

Danny Dolan, Managing Director at ETF issuer China Post Global, commented: “We’ve always said that inclusion was a question of when not if, and it’s looking increasingly likely to go ahead. China has made some very significant strides in its ongoing market reform programme which have addressed many of the concerns expressed by MSCI last year, while continued strong growth figures have further stoked international investor interest in the region.

“The launch of the Shenzhen Stock Connect programme has built on previous efforts to internationalise Chinese markets including the Hong Kong stock connect and the CEINEX segment of Deutsche Börse. Meanwhile MSCI’s revised inclusion policy, halving the initial weight, suggests they intend to make a controlled start and gradually increase China’s weight over an extended period. Provided they get sufficient buy-in from key institutional investors during the current market consultation, we expect a ‘yes’ this month.”

BlackRock, the asset manager behind the iShares line-up of ETFs, is understood to be supportive of inclusion.

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