I've been living on another planet. What did MSCI do?
MSCI announced that a list of large-cap A-shares — that is stocks of Chinese firms listed either on the Shanghai or Shenzhen stock exchanges — will enter the MSCI EM index. MSCI first began its review on whether to include A-shares four years ago, but each year since it declined to include them because of concerns around how easily foreign investors could access the market.
What reasons did MSCI give for its positive decision?
There were two key changes from a year ago. The first has been the launch of the Shenzhen Connect arm of the Stock Connect scheme in December 2016, which links the Hong Kong market with the second largest stock market in China, where many so-called new economy stocks are listed.
The second change was an agreement between MSCI and the authorities that onshore exchanges will not force index product providers, such as exchange-traded fund providers, to seek approval from them before launching products containing A-shares.
MSCI changed its tactics slightly this year, by focusing on stocks accessible via the Stock Connect, which has a very low barrier to entry and guarantees that an investor seeking A-share exposure will be able to obtain access without needing onshore trading accounts or gaining special licences from the Chinese authorities.
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. This is a significant win for China and investors around the world will need to come to terms with it.
What does this mean for investors?
The decision still gives global investors until May 2018 to begin rebalancing their portfolios, when half of the inclusion factor for A-shares becomes effective, with the transition completing in August 2018. While many investors will need this time to begin setting up front and back office systems to buy into the A-shares market, there is a long list of global and regional investors that have already taken the dip via existing access programmes such as Stock Connect and the RMB qualified foreign institutional investor (RQFII) scheme.
When will the updated indices become effective?
The new indices become fully effective in August 2018. However, MSCI is making available two provisional indices, one starting today — which is the MSCI China A International Large Cap Provisional Index — and the MSCI China and MSCI Emerging Markets Provisional Indexes starting August 2017.
These indices will allow index investors that want to begin their transition with ease to begin investing in A-shares ahead of the August 2018 deadline.
How many A-shares will become part of the MSCI EM index?
The full list comprises 222 stocks. This is more than the 169 which had been first proposed in March as part of MSCI's consultation. The change is due to the inclusion of a group of dual-listed stocks in China and Hong Kong, which MSCI said investors were happy to see included.
The list is nonetheless much smaller than last year when the proposal was to include over 400 stocks part of the MSCI China A International index. The stocks that were not eligible to trade under the Stock Connect were removed in the 2017 consultation.
So far so good, but what does this mean for China, markets and the world?
China gets a win because its stocks become part of a widely used index. MSCI wins in a way by making its indices more representative of the global financial markets — China is after all the second largest economy in the world, with the second-largest stock market and third largest bond market. As for everyone else, it is just one more signal that China is integrating with the rest of the world.
MSCI made no promises about increasing the rather low 5% inclusion factor in upcoming reviews. The index provider was clear that any progress will depend on China’s efforts to address outstanding issues that include a large number of suspended stocks, relaxing trading quotas, and overall better aligning China market standards to the international markets.
To see our in-depth coverage on the MSCI 2017 decision on A-shares, visit our homepage.
The June 21 MSCI announcement can be found here and a more in-depth look at the MSCI review process here.
