One of the leading index providers is once again looking into adding Chinese A-shares into its developing market benchmark, potentially raising the China exposure of a popular emerging market exchange traded fund play.
MSCI Indexes issued a new “inclusion roadmap,” a consultation paper for client feedback, to include Chinese A-shares in its Emerging Markets Index ahead of the index review in June, reversing its previous stance after stating that it would remove China from its annual review process, the Financial Times reports.
“The reopening of the consultation follows the recently implemented changes by the Chinese authorities aimed at enhancing the accessibility of the China A shares market for international institutional investors,” MSCI said.
MSCI previously chose not to include Shanghai and Shenzhen listed companies or Chinese A-shares to its benchmark Emerging Markets Index last summer after many expressed concerns over their ability to acquire and sell mainland shares.
The new inclusion proposal would allocate 1.1% of MSCI’s global EM index to mainland-listed Chinese shares.
With the potential inclusion of mainland Chinese stocks, the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), which tracks the MSCI Emerging Markets Index, could have a larger tilt toward China and lower weight in other emerging market countries. Currently, among its top country positions, EEM includes a hefty China 23.6%, along with South Korea 15.5%, Taiwan 12.%, India 8.1% and South Africa 6.7%. The emerging market ETF’s current China exposure includes securities listed in Hong Kong and on the New York Stock Exchange. [The ETFs Affected By MSCI’s China Change]
If MSCI does decide to include Chinese A-shares in its benchmark Emerging Market Index, China’s reputation in the global market could be enhanced as fund managers that track the emerging market index passively acquire China A-shares to augment their position.
[related_stories]Consequently, China A-shares markets and country-specific ETFs could also find support from the increased demand from asset managers. For instance, the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR), the largest U.S.-listed China A-shares ETF, previously attracted a lot of attention ahead of the major index talks surrounding mainland Chinese stock inclusion.
The road to China A-shares inclusion into MSCI Emerging Market Index may take a while as many still remember the volatility and heavy-handed response from Chinese regulators.
“International institutional investors continue to be concerned by the significant liquidity risks that may result from potential renewed voluntary suspensions in trading on the local stock exchanges of mainland Chinese companies,” according to MSCI.
Nevertheless, FTSE Russell has already developed the FTSE Emerging Markets All Cap China A Inclusion Index, which holds Chinese A-shares. The Vanguard Group’s Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), the largest emerging markets ETF by assets, has also been slowly transitioning to the new index. [Vanguard Lands Massive RQFII Quota]