Index provider MSCI (NYSE: MSCI) is slated to announce the results of its annual market classification review on June 9 and market observers are focusing on whether or not MSCI will elevate China A-shares into its global benchmarks.
There is speculation that MSCI could postpone its A-shares classification decision until later this year after Shenzhen joins the Stock Connect program. The Hong Kong-Shanghai Stock Connect launched in November aimed at increasing securities trading between Hong Kong and mainland China. Shenzhen-listed stocks have been called China’s version of the Nasdaq, which could imply MSCI has good reason to wait until after the launch of the Hong Kong-Shenzhen Stock Connect before rendering a decision on A-shares’ classification. [Rushing to A-Shares ETFs]
“The Stock Connect scheme is not due to add Shenzhen shares, which represent a large chunk of China’s equity market, until later this year leading to speculation MSCI may review A share inclusion again in the autumn if it decides not to push ahead this month,” according to Reuters.
China’s A-shares have been among the world’s best performers and five of the top 10 non-leveraged U.S. ETFs this year are A-shares funds. After faltering last week on news of increased margin requirements on mainland China, ETFs such as the Deutsche X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR) and the Market Vectors ChinaAMC A-Share ETF (NYSEArca: PEK), the oldest A-shares ETF trading in the U.S., could be vulnerable to MSCI delaying its classification decision. [Upping the Ante With China ETFs]
On May 26, MSCI rival FTSE Russell said it will transition A-shares into global benchmarks, meaning A-shares will eventually join the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), the largest emerging markets ETF by assets. However, $1.7 trillion tracks the MSCI Emerging Markets Index, the underlying index for the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), meaning MSCI’s treatment of A-shares is widely followed by global investors. [A-Shares ETFs Surge on FTSE News]
There is precedent for the Stock Connect scheme not being enough to prompt index providers to elevate A-shares into marquee global benchmarks. Soon after the debut of the Shanghai-Hong Kong Stock Connect, FTSE said the Stock Connect program is a step in the right direction, but not enough to merit a promotion of China’s A-shares equities to emerging markets status.
The KraneShares Bosera MSCI China A ETF (NYSEArca: KBA) is the lone U.S.-listed A-shares ETF that tracks an MSCI index. KBA is up 38.3% this year. The Market Vectors ChinaAMC SME-ChiNext ETF (NYSEArca: CNXT) and the Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund (NYSEArca: ASHS) have significant exposure to Shenzhen-traded issues. Those two ETFs are this year’s two best non-leveraged performers.
CNXT tracks the SME-ChiNext 100 (SZ399611), which provides exposure to the 100 most liquid mid- and small-cap stocks that trade on the Small and Medium Enterprise (SME) Board and the ChiNext Board of the Shenzhen Stock Exchange (SZSE). The SME Board is viewed as China’s NASDAQ, leading to CNXT’s heavy tech exposure.
MSCI is “considering an initial weighting of 5 percent for China A shares when they are first included in its Emerging Markets index,” according to Reuters.
KraneShares Bosera MSCI China A ETF (NYSEArca: KBA)