MSCI Inc.'s decision to give Shanghai- and Shenzhen-listed A shares their first toeholds, however small, in the New York-based company's benchmark indexes marks a coming-out party for China's capital markets on the world stage, market veterans say.
"With this inclusion, China is effectively open to the world, and investors are going to come in with the bridge that we build," said Chia Chin Ping, MSCI's Hong Kong-based head of Asia-Pacific research, in an interview.
MSCI announced early June 21 in Asia that it will add an initial, select weighting of 222 large-cap names to its widely tracked Emerging Markets and All World Country indexes, among others, in two steps between May and August 2018. For its three prior annual reviews, MSCI had declined to include A shares in its indexes, citing accessibility issues.
The inclusion of roughly 5% of China's A-shares market — the world's second-biggest with a market capitalization of roughly $7 trillion — will leave it accounting for a scant 0.73% of an MSCI Emerging Markets index tracked by $1.5 trillion of institutional money globally, 0.1% of the firm's ACWI and 0.83% of MSCI's Asia ex-Japan index. If the market is fully included, on the back of continued market opening moves by China, it will account for more than roughly 17% of the Emerging Markets index.
More than an MSCI decision, the move is "basically an endorsement from investors on the accessibility of A shares," said Mr. Chia. "It's now an opportunity set (that) everybody will need to look at," he added.
The small weighting and MSCI's decision to focus initially on large-cap, liquid companies — in contrast to previous proposals that included mid- and small-cap stocks — allowed money managers and asset owners to look beyond some outstanding concerns, such as daily limits on repatriating capital and the frequency with which smaller companies on the mainland have suspended trading in their shares in recent years.
Meanwhile, active managers tracking the MSCI EMI will be free to take their time getting acquainted with the A-shares market, as the 0.73% weighting makes tracking error from not having exposure there a relatively minor problem for now.
Still, if that first step toward A-shares inclusion is largely a symbolic one, market veterans said it is significant.
"While the initial number and the starting weight of A shares is small, the inclusion nevertheless marks the beginning of an era," wrote Qi Wang, the Hong Kong-based CEO of Chinese equities investment boutique MegaTrust Investment (HK), in an emailed analysis of MSCI's A-shares decision.
"Global investors have largely ignored the Chinese onshore market," with a combined stake of just 1.5%, but MSCI's decision confirms "the gravitational importance" of that market, agreed Karine Hirn, a Hong Kong-based partner with emerging and frontier market investment manager East Capital.