MSCI Inc. will include China A shares in the MSCI Emerging Markets Index and the MSCI ACWI Index beginning in June 2018.
This announcement made Tuesday afternoon has broad support from international institutional investors with whom MSCI consulted, 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.
Consequently, 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.
“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 ChinaA shares.”
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 May 2018 Semi-Annual Index Review followed by the second step which would take place as part of the August 2018 Quarterly Index review. MSCI reserves the right to revise the planned implementation to a single phase should the daily limit on Stock
Connect be abolished or significantly expanded before the scheduled inclusion dates.
MSCI will start to calculate a number of MSCI Provisional Indexes as part of the MSCI ACWI Index Series that include China A shares. These indexes serve to manage the implementation of the inclusion of China A shares in investors’ portfolios on the schedule of their choosing.
In particular, MSCI will launch the MSCI China A International Large Cap Provisional Index on June 21, 2017, followed by additional global and regional provisional indexes, including the MSCI China and MSCI Emerging Markets Provisional Indexes, in August 2017.
Briand added, “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. MSCI is very hopeful that the momentum of positive change witnessed in China over the past years will continue to accelerate. ”
MSCI performed an extensive and in-depth cross-regional consultation on the potential partial inclusion of China A shares in the MSCI Emerging Markets Index. This global consultation included a large number of asset owners, asset managers, broker/dealers and other market participants.
International institutional investors welcomed the expansion of Stock Connect and viewed it as a more flexible access framework compared to the current QFII and RQFII regimes. They also welcomed the decrease in the number of suspended China A shares, but continue to view the number of suspensions as an outlier compared to other international markets.
Investors encouraged the Chinese authorities and exchanges to consider additional measures to address the issue of suspensions. The proposal to include Large Cap shares that are not in trading suspension was approved by the vast majority of institutional investors.
Additionally, many of them also recommended that MSCI include China A Large Cap shares of companies that already have H share equivalents in the MSCI China Index.
Hence, MSCI has amended its original proposal to include all China A Large Cap shares accessible through Stock Connect that are not excluded due to trading suspension. This change to the original proposal brings the number of China A shares in the pro forma MSCI Emerging Markets Index from 169 to 222.