Chinese A shares — stock listed on mainland exchanges — are an increasing focus of the major index providers, with both FTSE Russell and MSCI Inc. providing provisional indexes for incorporating this portion of the Chinese equity market into their broad emerging market benchmarks.
I've helped lead my firm in taking a position against the inclusion of China A shares into these benchmarks. Part of this resistance was based on the seeming bullish mentality by the index providers, which led them to make exceptions to their own admissibility criteria. Another concern was the sheer size that A shares would represent in the resulting indexes. This would cause most investors to hold roughly 20% of their emerging markets exposure in markets that were distinctly investor unfriendly, especially when the main method of market access was a quota program, found in no other country, had limited redemptions and had a “use-it-or-lose-it” feature problematic to the investment style of most asset managers. This combination of investor-unfriendly market dynamics paired with a large market size is somewhat anomalous. It appears that index providers have primarily focused on the size of the Chinese marketplace, rather than on the lack of investor access and protections, when considering the inclusion of A shares into their indexes.
The establishment by Chinese authorities of the Shanghai-Hong Kong Stock Connect program marked a meaningful advancement in accessibility to the Chinese A-share market. With the connect program, access was opened to a wider array of investors, and officially required much less in the way of regulatory filings on the part of the foreign investor. Since its launch in 2014, program volumes have grown, and this venue now appears to offer a viable alternative to the quota-based program. This evolution has taken away a portion of our concerns around market access; however it should be noted a quota still exists on trade volumes allowed in the connect program, and the entire A-share market is not available through the connect program.