MSCI to Add Chinese Mainland Shares to Emerging Markets

The provider said it intends to add 222 China A large-cap stocks to the EM index, representing on a pro forma basis approximately 0.73% of the index's weight at a 5% partial inclusion factor.

Those determined to trade A-shares can look at opening an account to trade shares via HK Stock Connect, which now allows two way trading between the Hong Kong and Shanghai markets. The first inclusion step would coincide with the May 2018 Semi-Annual Index Review followed by the second step which would take place as part of the August 2018 Quarterly Index review.

Previously, MSCI had delayed the inclusion of the Chinese stocks because of certain investment restrictions.

MSCI is also including A shares in its All Country World Index.

China A shares will not be included immediately in the indexes, hence immediate reaction in Shangahi was muted. "And global investment styles that emphasize value play are expected to subtly influence China's speculative and volatile stock market, which is another significance of the inclusion", Qiu said.

MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.7 per cent, with Australia's commodity-heavy market down 1.1 per cent. Japan's Nikkei eased 0.2 percent.

BlackRock Inc, the world's largest asset manager, endorsed MSCI's decision.

The spread between yields on United States five-year notes and 30-year bonds shrank to the smallest since 2007 as investors wagered the Federal Reserve might have to delay further rate hikes. Investors encouraged Chinese authorities and exchanges to consider additional measures to address the issue.

"The scale of rebalancing required by index trackers will be much less than the impact of the 2015-16 addition of overseas listed stocks (i.e. the China ADRs) which were four to five times larger", UBS strategists Niall MacLeod and Matthew Gilman wrote in a note.

If China A shares were to be included, consumer and real estate stocks in particular would see their weighting increase - at the expense of financials - under MSCI's new methodology unveiled in March, which will cut the number of constituents to 169 from 448.

"BlackRock has continued to support all opening of investment in China's onshore capital markets for a number of years". Taiwan's is set to be 12.07 percent after China's initial inclusion, from 12.23 percent.

It said the decision had been made after receiving broad support from worldwide investors following the success of the Hong Kong and the Shanghai and Shenzhen Stock Connect programmes, and the loosening of restrictions to creating index vehicles by local Chinese stock exchanges.

Chinese stocks will be included for the first time in a leading USA index of emerging market shares. MSCI will continue to monitor the situation and launch a public consultation to solicit feedback from investors once warranted. Partly because of such pressures, all types of foreign investors now own only a little more than 4 percent of the market.

MSCI says global institutional investors welcome the expansion of Stock Connect and view it as a more flexible access framework than the current QFII and RQFII regimes.

Investors can already access Chinese domestic companies via listings on exchanges in Hong Kong, Singapore, the U.S., and the UK.

MSCI announced that it is launching a consultation on the potential inclusion of the MSCI Saudi Arabia Index in the MSCI Emerging Markets Index. China's market cap is roughly $US7 trillion. "Obviously, over time, the further involvement of global active funds in the A share market will benefit companies with superior fundamentals rather than simply thematic stories".

He said the stock connect programs serve as a "translator and adapter" between different stock market mechanisms. The new model includes, among other noted improvements, the expansion of the settlement cycle from T+0 to T+2, the introduction of a proper delivery versus payment (DvP) settlement provision, proper failed trade management, and the introduction of short selling and securities borrowing and lending facilities.

MSCI decided not to add Argentina to the benchmark index and will consult on adding Saudi Arabia.

  • Zachary Reyes