China's domestic A shares should gain their first toehold in MSCI Inc.'s global emerging markets index when the New York-based company announces its annual benchmark index revisions on June 20, after three years of delays over market access concerns.
If those concerns are finally overcome on the fourth go-round as widely expected, MSCI's decision two months ago to halve its proposed A-shares index weighting to 50 basis points will have helped grease the skids for China's inclusion, industry veterans say.
A weighting that small would amount to token exposure for the world's second-largest stock market, but the move would still be highly significant, contend offshore money managers investing in Shanghai and Shenzhen-listed shares.
Even if MSCI's latest proposal is a “watered-down version of its earlier proposal … it should still be a watershed event for the Chinese stock market,” said Wong Kok Hoi, founder and chief investment officer of Singapore-based APS Asset Management Pte Ltd., in a note to clients in early May.
If that marginal weighting's immediate import is largely “symbolic,” it would still mark the beginning of China's inevitable rise in global portfolios, even as it allows investors focused on remaining irritants — such as the 20% monthly limit on repatriations of capital invested under China's qualified foreign institutional investor program — to sit out for now without fear of underperforming the benchmark, agreed a Hong Kong-based institutional salesman with a global money manager who declined to be named.
If A shares are included in the MSCI index, it will be more “a turtle race” than “off to the races,” said the institutional salesman. But the fact that “the race has begun” will be important, and whether it's this year or next year, it probably won't be much longer than two or three years before “people … really start to get serious” about adding A shares to their portfolios, he said.
“The short-term impact will be small,” agreed Mr. Wong, “but investors will start preparing for the day China A becomes a significant part of the indices — not just global emerging markets. Today, most foreign investors don't have a single resource allocated to track China A,” he said.