China’s A-shares finally get MSCI inclusion

MSCI includes 222 of China’s A-shares within its Emerging Markets index after several years of waiting.
By Paul Walsh
China’s A-shares have been included within the MSCI Emerging Markets index following a string of disappointments in recent years.

The index provider will add 222 China A large-cap stock to the Emerging Markets index, in a major development for the Chinese markets.

The stocks will represent on a pro forma basis approximately 0.73% of the weight of the index, according to MSCI.

“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, MSCI managing director and chairman of the MSCI Index Policy Committee.

“The expansion of Stock Connect has been a game changer for the market opening of China A-shares,” he said.

Briand also said a higher representation will be included upon further alignment international market accessibility standards occurs along with institutional investors gaining further experience in the market.

Commentators had predicted China’s inclusion this year citing a “trimmed down and scaled approach” as a key factor.

This year’s proposal included 169 stocks – rather than the 448 stocks in previous years – which are highly liquid with a large cap and have never been suspended for trading for more than 50 days within the past 12 months.

The most recent disappointment for the Chinese market came last June, despite high expectations at the time as MSCI announced it was working with Chinese regulators.

In March, MSCI indicated a number of obstacles were preventing selection.

These included the removal of the 20% Qualified Foreign Institutional Investors (QFII) monthly repatriation restriction, implementation of new trading suspension treatment as well as resolution of pre-approval requirements by the local exchanges on launching financial products.

Inclusion in the index may also lead to a boost for the country’s Shenzhen Stock Connect initiative.

The Shenzhen-Hong Kong trading link commenced last December following final approval from Hong Kong’s Securities and Futures Commission and the China Securities Regulatory Commission.

It recorded an underwhelming opening day of trading as northbound Shenzhen trades stood at RMB 2.7 billion, around a fifth of the RMB 13 billion quota.

Reports indicated that investors have only used an average of 5% of the daily quota for investment into the Shenzhen initiative, as foreign participation levels remain modest.

Talking to Global Custodian earlier this month, experts put this down to concerns around capital controls and market volatility which could be addressed by MSCI inclusion.

“The limited turnover we have seen so far has been driven by a period of relatively low foreign participation in A-shares so demand for A-shares has been quite suppressed,” said Barnaby Nelson, managing director and head of securities services for Greater China and North Asia at Standard Chartered earlier this month.

“This doesn’t leave much breathing space for Shenzhen until the MSCI decision, once this happens, we will see new demand coming in and a big volume pick up, commencing from late summer. All this should begin happening in the next four to six months.”