Chinese equities will be going mainstream next year following a decision by the MSCI to include 222 China A-shares in the MSCI Emerging Markets Index (EMI). China A-shares were traditionally only available to domestic and qualified institutional investors, but have recently expanded global investor access through the Hongkong-Shanghai and Hongkong-Shenzhen Stock Connect programs.
The A-share market, including shares from Shanghai and Shenzhen markets, is worth roughly $7.5 trillion, the world’s second largest after the New York Stock Exchange and Nasdaq.[i]
“The decision to include China’s A-shares on the MSCI Emerging market index is very positive for the onshore listed companies as well as foreign retail and institutional investors, who will now benefit from more investment opportunities in China’s domestic growth” says Christine Tan, Chief Investment Officer and Senior Portfolio Manager with Excel Investment Counsel Inc. “This decision comes after four years of consideration, during which the Chinese regulators have made many positive changes to improve investor access to the onshore equity market.”
“These A-share corporations will benefit from increased investor interest and flows,” says Tan. “In turn, mutual funds such as the Excel China Fund and Excel Chindia Fund will now invest directly in China-listed companies for further diversification and access to sectors that were not well-represented on the HongKong exchange.”
Almost $18 billion to move into Chinese stocks
According to the MSCI, the inclusion of A-shares on the index will result in about $17 billion to $18 billion of global assets moving into Chinese stocks initially. According to MSCI, future inclusion of the remaining A-shares in the MSCI EM Index could see more than $340 billion of foreign capital flow into China.
[ii]The majority of the A-shares that will be added to the index are financial and industrial companies, many of which are state-owned. Of the 222 stocks that will be listed, 50 are in the financial sector with a total weight of 36%, and 44 are in the industrial sector with a total weight of 16%.
The stocks would represent a total weighting of about 0.73% in the benchmark, and will be included on the index in two-phases, in May and August 2018.
Commenting on the inclusion of the A-shares, Kevin Anderson, senior managing director of State Street Global Advisors and head of investments in the Asia Pacific noted: “Given the size and importance of China as an economic superpower, I think this is a historic moment.”[iii]
He adds: “It’s a long-awaited and much-debated decision in the past, and I think it’s more than symbolic as it will create additional flow of capital and potentially a new segment of institutional investors in the China market.”[iv]