MSCI on Wednesday proposed including a fraction of China's domestic A shares in its widely tracked MSCI Emerging Markets index beginning in May 2015, pending consultations with institutional investors and money managers.
The proposal — to include 5% of the free-float market-capitalization weight of A shares — would leave those shares accounting for 60 basis points of a portfolio tracking the MSCI Emerging Markets index.
H shares, for China-based companies listed in Hong Kong, now account for 9.9% the index, while other classes of Chinese shares — red chips, P chips and B shares — represent a combined 9.4%.
Depending on the investor feedback, the proposal “may or may not lead to any changes to the MSCI indexes,” according to an MSCI news release.
A final decision on including China's huge domestic equity market — which at a 100% weighting would account for 10.2% of the MSCI EMI today — will be made in three months, at the time of MSCI's annual market classification review, said Chia Chin Ping, MSCI's Hong Kong-based head of research.
In an interview, Mr. Chia said a number of factors dictated MSCI's proposal to include just 5% of China's A shares market at first, including practical considerations for what that would mean for institutional investors and money managers looking to track the EMI under a system for which China's regulators dole out quotas for access to the country's domestic markets.
According to data provided by MSCI, with a weighting reflecting a 5% share of China's A-shares market, even the biggest sovereign wealth funds, pension funds and insurance companies should be able to get the capacity they would need within prevailing quota ceilings for different classes of institutional investors.
There could be issues, however, for some of the biggest money management firms, whose quota needs — even for that fraction of the market — would exceed US$1 billion, noted Mr. Chia.
