MSCI expected to quadruple China A-Shares inclusion in emerging market index

The increase will signify the latest advancement in the opening up of China’s capital markets to foreign investors.

By Joe Parsons

MSCI is being tipped to quadruple its weighting of Chinese shares available to trade within its flagship emerging markets index by August.

The expected increase will come one year after MSCI included 230 Mainland-trade stocks, roughly 5% of all China A-Shares, to its emerging markets and global indexes.

The index provider underwent a consultation with traders and market participants following the back-end of last year, proposing a significant increase to the number of shares available on the benchmark.

The increase will signify the latest advancement in the opening up of China’s capital markets to foreign investors, despite international tensions with the US and concerns over volatility of Chinese stocks.

“Conservatively, we forecast RMB400 billion of foreign inflows into the A-shares market this year due to the further inclusion. We also expect an increase in demand on active as well as passive flows,” said Patrick Wong, head of China sales and business development, HSBC Securities Services.

“Beijing’s commitment to further open up its capital market is also making investors both onshore and offshore more comfortable, especially by enhancing IPO process, improving corporate governance and reducing suspended stocks significantly.”

The decision could potentially boost trading in the Stock Connect scheme, the cross-border trading platform between Hong Kong and the Shanghai and Shenzhen Stock Exchange.

According to HSBC, foreign investors have favoured access China’s equity markets through the Connect scheme. However, research from Huntai Securities and AllianceBernsetin shows foreign flows through Stock Connect have concentrated in a small number of Chinese stocks, mostly large caps.

In addition, around 1,480 companies listed on the Stock Connect scheme have less than 5% ownership.

According to data compiled by MSCI and the Hong Kong Stock Exchange, the value of A-Shares as of 30 September by offshore investors using the Stock Connect programme had doubled over the year to $96 billion.

Rival benchmark provider FTSE Russell announced it would also add A-Shares from June 2019.