MSCI Inc. will be increasing the weight of China A-shares in its indexes by upping the inclusion factor from five to 20 per cent in three steps.
“Stock Connect has proven to be a robust channel to access A-shares,” said Remy Briand, MSCI’s managing director and chairman of the MSCI Index Policy Committee, in a press release. “The successful implementation of the initial five per cent inclusion of China A-shares has been a positive experience for international institutional investors and has fostered their appetite to increase further their exposure to the mainland China equity market.”
The implementation will be rolled out in three steps. First, to coincide with its May 2019 semi-annual index review, MSCI will increase the inclusion factor for all China A large-cap shares in its indexes from five to 10 per cent and add ChiNext large cap shares with a 10 per cent inclusion factor.
After this, to coincide with the August 2019 quarterly index review, it will increase the inclusion factor of all China A large-cap shares in its indexes from 10 to 15 per cent.
Finally, to coincide with its November 2019 semi-annual index review, it will increase the inclusion factor of all China A large-cap shares from 15 to 20 per cent and will add China A mid-cap shares, including eligible ChiNext shares, with a 20 per cent inclusion factor.
MSCI’s announcement comes after extensive consultation with institutional investors.
“The strong commitment by the Chinese regulators to continue to improve market accessibility, evidenced by, among other things, the significant reduction in trading suspensions in recent months, is another critical factor that has won the support of international institutional investors,” said Briand.
Andrew Mattock, portfolio manager of the China strategy and China fund at Matthews Asia, says this inclusion is a step in the right direction and helps create awareness about the opportunity set in China, but there’s still a long way to go.
“The A-share market is an enormous market — it’s more than US$6.5 trillion and the amount that is being included is really quite small relative to the size of the market,” he says. “So, although this is a positive step, the broader trend, I think, long term is for people to understand that this is still just a small step in reflecting the economic reality that we all understand already exists in China.”
When it comes to including ChiNext and mid-cap shares, Mattock is supportive. “We like to see broad inclusion because it’s a better reflection of the investment opportunity.”
However, through the consultation, international institutional investors stressed going beyond 20 per cent weighting would require Chinese authorities to address a number of remaining market accessibility questions, MSCI noted.