MSCI's decision to include China A-shares in index

Xinhua | Updated: 2017-06-21 16:39
BEIJING - Global equity indexes provider MSCI announced Tuesday that beginning in June 2018, it will include China A-shares in the MSCI Emerging Markets (EM) Index and the MSCI ACWI (All Country World Index) Index.

MSCI plans to add 222 China A Large Cap stocks, representing on a pro forma basis approximately 0.73 percent of the weight of the MSCI Emerging Markets Index at a 5-percent partial Inclusion Factor, according to its 2017 market classification review released Tuesday.

According to the review, a two-step inclusion process will be used to account for the existing daily trading limits on Stock Connect. The first inclusion step would coincide with the MSCI's May 2018 Semi-Annual Index Review followed by the second step which would take place as part of the August 2018 Quarterly Index review.

Broad support

The decision has "broad support from international institutional investors" with whom the company consulted, said the MSCI, adding that it was 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.

MSCI, a US independent provider of research-driven insights and tools for institutional investors, launched its first global equity indexes in 1969. MSCI currently serves 97 out of the top 100 asset managers, according to its official statistics.

Over nearly half a century of development, a variety of MSCI indexes have become "weather vanes" for a vast majority of global investors. A stock being included into one of its important indexes might bring considerable buying.

"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." said Remy Briand, MSCI Managing Director and Chairman of the MSCI Index Policy Committee.

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

"When further alignment with international market accessibility standards occurs, sustained accessibility is proven within Stock Connect and international institutional investors gain further experience in the market, MSCI will reflect a higher representation of China A shares in the MSCI Emerging Markets Index," said Briand.

Since MSCI delayed the inclusion of China A-shares for the third time in 2016, Chinese authorities have taken several measures to ease international investors' concerns over the A-share market's accessibility: arbitrary trading suspensions were better regulated and restrictions on qualified foreign institutional investors were further relaxed, while the Shenzhen-Hong Kong stock connect scheme was launched to broaden channels for foreign investment in the A-share market.

To boost investor confidence

Zhu Linjun, a veteran Chinese investor living in Shanghai, was excited upon hearing the MSCI decision. He took a selfie with a V-hand gesture and uploaded the picture to a social networking app at midnight, collecting dozens of "likes" in just a few minutes.

"This is big good news for the A-shares market that has suffered turbulence for long," said Zhu, who has seen bulls and bears in China's stock market.

Although initial capital inflows following the decision may not produce material influence on the A-shares, China's stock shares being added to the global investor giant's portfolio will further boost investor confidence, Zhu said.

Qiu Yanying, chief advisor of Pinjin (Beijing) Asset Management who has worked in private placement for over 20 years, seemed cool-headed in response to the highly expected inclusion. He believed that as the world's second largest equity market, the A-shares has gained its international status commensurate with its volume; meantime, the accession of Chinese stocks enables MSCI's global coverage to be more complete.

Qiu said frequent interaction between A-shares and MSCI manefested a process of continuous self-improvement and opening up of China's capital market.

"Entry to global key indexes has indicated that the Chinese stock market has become increasingly international. 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.

To deliver more Chinese dividends

Market analysts have spoken highly of the MSCI decision.

Brendan Ahern, chief investment officer at Krane Fund Advisors, told Xinhua on Tuesday that the MSCI inclusion begins "adjusting China's weight within global equity indices to match its importance to the global economy."

Tom Orlik, chief Asia economist for Bloomberg Intelligence, said in an interview with Xinhua on Tuesday that MSCI inclusion confirms and will accelerate the trajectory of China's capital market opening.

"China's policymakers have already made important strides in opening capital markets to global investors...MSCI inclusion should be a catalyst to accelerate that process - working to maximize gains to efficiency from global integration and minimize disruptions from destabilizing short-term flows." Orlik said.

Earlier, Zhang Xiaojun, a spokesman for the China Securities Regulatory Commission (CSRC) said the commission is pleased to see the inclusion of A-shares into the MSCI index and welcomes the decision, adding that China's stock market and its whole capital market will not change the direction of reforms toward being more market-oriented, law-based and internationalized.

Zhang has also noted that any merging markets stock index is "incomplete" without Chinese shares.

Observers believe MSCI's inclusion of A-shares can be seen as the outcome of the reform and evolution of China's capital market as well as an opportunity for global investors and the Chinese market to better interact with one another.

As the size and development dividends of the Chinese capital market cannot be overlooked, adding A-shares to the MSCI portfolio will help China further push forward its financial reforms and in return benefit the world by delivering more Chinese dividends.
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