MSCI to add China A shares to Emerging Markets Index
MSCI has announced plans to include 222 large-cap China A shares in its Emerging Markets Index, with the stocks being added in summer 2018.
The decision, which MSCI says enjoys ‘broad support’ from the international institutions it consulted with, comes ‘primarily as a result of the positive impact on the accessibility of the China A market of both the Stock Connect program and the loosening by the local Chinese stock exchanges of pre-approval requirements that can restrict the creation of index-linked investment vehicles globally,’ states MSCI in a press announcement. This marks a change to the original proposal, which brings the number of China A shares in the pro forma MSCI Emerging Markets Index from 169 to 222 – approximately 0.73 percent of the weight of the index.
‘International investors have embraced the positive changes in the accessibility of the China A shares market over the last few years and now all conditions are set for MSCI to proceed with the first step of the inclusion,’ says Remy Briand, MSCI managing director and chairman of the index policy committee, in the organization’s 2017 market classification review. ‘The expansion of Stock Connect has been a game changer for the market opening of China A shares,’ he adds.
Sebastien Lieblich, MSCI managing director, explains in a video accompanying the announcement that the inclusion of the stocks would happen in two stages ‘to take into consideration daily trading limits imposed on Stock Connect.’ The first step would be implemented in May next year and the second in August 2018.
Lieblich adds that investors are looking for – among other things – possible further inclusion of China A shares on the MSCI Emerging Markets Index. Such inclusion, he says, would be subject to four points: the resilience of Stock Connect, the removal of the daily trading limit on Stock Connect, a significant decrease in suspensions witnessed on the China A shares market and further loosening of the pre-approval requirements. ‘Further inclusion could be implemented by increasing the inclusion factor, which is currently set to 5 percent, and adding mid-cap stocks to the MSCI Emerging Markets Index,’ Lieblich concludes.
While the decision will give more investors a welcome window into China’s growth story, concerns have been raised. ‘Is this the right time for global investors to be exposed to China? It’s hard to argue that the level of investor protection, regulatory consistency and overall corporate governance in China is high enough,’ Jamie Allen, secretary general of the Asian Corporate Governance Association (ACGA), tells Nasdaq. The ACGA also points out that China ranks ninth out of 11 Asian economies for corporate governance, with scores having actually dipped since 2014.