MSCI has announced that it will include China A-Shares in its Emerging Markets Index. A total of 222 A-Shares will be added to the MSCI EM Index under as part of a two-step process which will begin in May 2018. The A-Shares to be included in the index are large-cap stocks that are eligible for the Stock Connect Programmes. Upon completion, Chinese A-Shares will represent approximately 0.73% of the value of the MSCI Emerging Markets Index.
In its press release announcing the decision, MSCI stated that its decision to include A-Shares is primarily a result of the positive impact of the Stock Connect programme and the loosening by local Chinese stock exchanges of pre-approval requirements that can restrict the creation of index-linked investment vehicles globally have had on the accessibility of the China A-market.
What Does it Mean for Passive Fund Investors?
ETFs and index funds tracking the MSCI China, MSCI Emerging Markets, and other indices will add some or all of these 222 A-Shares to their portfolios and will ultimately follow along, reacting to any subsequent inclusions that materialise as part of this longer-term roadmap. This inclusion brings A-Shares deeper into the global investment arena, and we urge investors to make an effort to understand the fundamentals of investing in China A-Shares which are slated to grow in their importance in global benchmarks.
We believe other index providers will also be likely to review their China A-Share inclusion plans. While the current A-Shares inclusion only represents a small weighting in global benchmarks – 0.1% in MSCI ACWI; 0.73% in MSCI EM, we would suggest investors reassess their positions as it pertains to country weights and industry weights, especially as the different indices continue to adjust their scope of A-Share inclusion.
MSCI's inclusion brings A-Shares deeper into the global investment arena. China A-Shares will continue to grow in their importance in global benchmarks. We believe other index providers are likely to review their China A-Share inclusion plans.
Most notably, China A-shares remain on FTSE Russell's Watch List, and will be reviewed for possible addition to the FTSE Global Equity Index Series as a Secondary Emerging market at the firm's next Annual Review in September 2017. However, recall that in May 2015, FTSE Russell introduced "China A-share Inclusion Indices" as a transitional tool for investors in anticipation of the eventual inclusion of China A-shares in its global benchmarks.
Vanguard FTSE Emerging Markets ETF listed in the US, subsequently switched to the FTSE Emerging Markets All Cap China A Inclusion Index and added China A-Shares in their portfolios. As of 31 May 2017, the FTSE Emerging Markets All Cap China A Inclusion Index has a 5% stake in A-Shares. This is much larger than the pro forma A-Shares weighting of 0.73% in the MSCI EM Index.
Investors should continue to understand further the fundamentals of the A-Share market, as well as the makeup of the indices tracked by the various funds tied to them, as the A-Shares exposures could be quite different for any chosen ETF.