China A-shares added to MSCI indices for first time

MSCI said 222 large-cap A-share companies will be added to its Emerging Markets Index and All Country World Index.

The newly introduced Investors' and Exporters' (I&E) foreign exchange window targeted at foreign portfolio investors could earn Nigeria reprieve from being demoted from the MSCI's frontier markets index.

"While China's weighting in the MSCI Emerging Markets Index may ultimately rise to 40 percent or so, this rise is likely to be slow", they added.

China's stocks took a major step toward global acceptance on Wednesday, finally winning a long campaign for inclusion in a leading emerging markets benchmark, in what was seen as a milestone for global investing.

The spokesperson vowed to protect investors' legitimate rights, improve the capital market's competence to serve the real economy and increase its worldwide influence.

Inclusion in the index marks a key victory for the Chinese government, which has been working steadily over the past few years to open up its capital markets, investors said.

The FSC said it will take years for the full inclusion, citing the cases of Korea and Taiwan.

MSCI has previously declined to include China in the EMI three times amid investor complaints about curbs on repatriating capital from China and concerns over the country's large number of suspended stocks.

Since March, A-shares eligible for the index inclusion have outperformed the mainland benchmark by 11% on average, meaning the inclusion had been priced in by the market, said Karine Hirn, partner at East Capital.

The significance of the maths involved, with 222 Chinese mainland stocks being included in the MSCI Emerging Market (EM), commanding a 0.73% weighting in the index, is that we should see around $12 billion of net buying in Chinese shares from passive funds that track the MSCI EM index.

"It showed worldwide investors' confidence in a stable Chinese economy with better prospects and in the steadiness of China's financial market", Zhang said. The company said the Chinese representation in the index could be increased in time if China enacts additional reforms.

MSCI has just given credit to the influence of mainland China, and possibly some of its luxury brands, on the global economy.

Despite a small weighting of 0.73% of the total MSCI EM index, the inclusion means that RMB-denominated equities will now become part of an index owned by a wide range of investors around the world - from large official institutions to pension funds and to individual retail investors.

Inclusion in MSCI could spur about $17 billion of inflows into Chinese shares, the index compiler said.

MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.8 percent, with Australia's commodity-heavy market down 1.5 percent.

"China A shares are estimated to grow to as much as 15 per cent of the Emerging Market Index market cap, yet the timeframe for that remains uncertain".

"The expansion of Stock Connect has been a game changer for the market opening of China A shares".

The revised proposal helped address these issues because the 169 stocks can be easily accessed by foreigners through the "Stock Connect" link launched in 2014 and significantly expanded in December.

This is not to say that as emerging market stocks they are not risky, but one could argue they are as risky, perhaps less so, than AIM shares.

  • Zachary Reyes