Index provider MSCI Inc. said last week it will include China A shares in the MSCI Emerging Markets Index and the MSCI ACWI Index beginning in June 2018.
That move is seen as beneficial to an array of exchange traded funds, including the VanEck Vectors ChinaAMC SME-ChiNext ETF (NYSEArca: PEK), VanEck Vectors ChinaAMC CSI 300 ETF (NYSEArca: CNXT), iShares MSCI China A ETF (BATS: CNYA) and db X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR).
CNYA tracks an MSCI index composed of Chinese equities listed on the Shanghai and Shenzhen Stock Exchanges. Still, global investors have concerns about Chinese equities and the country’s efforts at reforming its economy.
“Policymakers have in fact taken important steps to seek to address China’s problems, particularly since 2013. For example, the government has introduced broad supply-side reforms to curtail overbuilding and unlimited access to credit,” said BlackRock in a recent note.
MSCI plans to add 222 China A Large Cap stocks, representing on a pro forma basis approximately 0.73% of the weight of the MSCI Emerging Markets Index at a 5% partial Inclusion Factor. The MSCI move includes some stocks with listings in Hong Kong and on mainland China.
Investors are coming to grips with the fact that China’s economic growth is not what it was during the go-go days of the emerging markets boom. For an economy often deemed as too hot, steady, consistent growth could be what foreign investors really want to see.
Related: Optimism for Big China ETF After MSCI Announcement
“This isn’t the shoot-the-lights-out growth that drove the old China narrative, but rather a normalization to okay-but-more-sustainable growth that has been supported by balanced policies and the unwinding of past excesses. The markets have only slowly embraced this next chapter—suggesting a possible entry point for investors to consider who are willing to bypass the consensus,” said BlackRock.
Ongoing reforms, notably from the supply side, could further support Chinese economic growth. Reforms have bolstered industrial profitability and strengthened commodity prices. China’s exporters are also enjoying improvements from a rebound in global trade.
The Chinese economy is also shifting towards domestic-oriented consumption as a main growth driver. Consequently, consumption-driven sectors like technology and services are becoming a growing component in the economy.
Related: 6 China ETFs Moving Toward Healthy, Stable Growth
“Patience may be required. China’s equity markets have historically been closed and loosely regulated. That has been gradually changing, with the opening of markets through Shanghai-Hong Kong Stock Connect and other programs. And more recently, MSCI announced the partial inclusion of China A-shares (listed on Shanghai and Shenzhen Exchanges) in the MSCI Emerging Market Index and other global indexes (effective in summer 2018),” adds BlackRock.
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