China A shares will debut May 31 as a bit player in MSCI's widely tracked Emerging Markets index, but if all goes smoothly they could take on a leading role in the not-too-distant future.
Money managers focused on China report a sharp expansion in the ranks of institutional investors globally taking notice.
For the moment, they say, the pickup in mandates has been incremental ahead of MSCI's move to add the first 2.5% of the Shanghai and Shenzhen equity markets to its index at month's end.
That modest uptick masks a fundamental change in attitude among institutional investors globally, promising more substantial inflows to come, they predict.
A year ago, investors viewed the question of A shares exposure as "not so material," but a growing number seem to have a sense of urgency now, rushing to complete their due diligence, said Wong Kok Hoi, founder and group chief investment officer of APS Asset Management Pte. Ltd., Singapore. The China equity-focused boutique had $3.1 billion in mostly institutional assets under management as of the end of 2017.
Those investors aren't looking at China's current weight in the index, which will be 40 basis points when that initial 2.5% of the mainland markets is included on May 31, and still a scant 80 basis points when another 2.5% is added at the end of August, said Mr. Wong. Instead, investors "are looking at the future China weight in the index," which eventually will exceed 16% when the market is fully included, he said.
After China's "almost inconsequential" debut, the country's weight in the index "will increase very quickly in coming quarters," Mr. Wong predicted.
Chia Chin Ping, MSCI's Hong Kong-based head of research for the Asia-Pacific region, in a May 21 interview, suggested that follow-on steps to further boost A shares' presence in the index could be mapped out as early as the second half of this year.
"For sure we want to wait, observe and make sure the initial inclusion is a success (but) after the end of August ... we're likely to find an appropriate time to come back to the market to talk about the next phase of inclusion," Mr. Chia said.
Investment consultants report signs of growing client interest in A shares.
"We've definitely seen more queries and interest from our clients to look at China this year," with a number seeking dedicated China exposure, said Wilson Chen, a Singapore-based senior investment director with investment consulting firm Cambridge Associates.