June 2017

China A: MSCI inclusion decision

Summary

On June 20th, MSCI announced the partial inclusion of China A-shares in the MSCI Emerging Market (EM) Index to represent 0.73% of the index (effective in summer 2018). While the immediate market impact may be muted, the long term investor implications are likely to be far-reaching.

A larger slice of the pie

Historically, foreign investors have had unrestricted access to only about half of China’s over US$8 trillion equities market (via H-share, Red-Chip, P-Chip and foreign listed equities).1 The remaining half is comprised of A-shares, which were only available to foreign institutions under strict quotas set by the Chinese government.

Significant progress has been made in adding flexibility to the quota system and capital mobility (for example through the Shanghai-Hong Kong connect program, which allows international investors to access local China A-Shares through less restrictive mechanisms via the HK market). One condition of full MSCI index inclusion is the eventual complete removal of the quota system.

By having a larger weight in secular growth sectors (including materials, industrials, consumer discretionary and healthcare), A-shares provide access to sectors of the economy currently under-represented in other share classes.

Too big to ignore

Many investors believe that China is currently under-represented in global equity indices relative to its economic influence (for example, China represents roughly 17% of global GDP, 11% of global trade, and 9% of global consumption but today comprises only a 3.5% weight in the MSCI ACWI Index).1,2 Given the size of the China A-shares market, inclusion in global indices is regarded as key to bringing China’s overall representation more closely in line.

Initially, only 5% of the market capitalization of the eligible stocks will be included (0.73% of the MSCI EM Index). Over time, full inclusion could bring China’s weight in the index from over 27% today to nearly 45%.2

Understanding the major Chinese equity share classes4

Understanding the major Chinese equity share classes


“Roadmap” for potential 100% inclusion
in the MSCI Emerging Markets Index

“Roadmap” for potential 100% inclusion in the MSCI Emerging Markets Index

Source: BlackRock, MSCI, as of 6/20/17. Notes: Index constituents subject to change. *The percentage number refers to the Inclusion Factor applied to the free float-adjusted market capitalization of China A share constituents in the pro forma MSCI China Index.

Long-term implications for investors

Implementation of the changes announced by MSCI are expected to take effect in summer 2018 and are unlikely to significantly impact Chinese equities in the short term. Nonetheless, inclusion represents a successful step in a multi-year effort to liberalize China’s capital markets. The eventual entry of a more institutional client base could also lead to a more balanced and stable Chinese onshore equity market.


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