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MSCI consulting on increasing weighting of China A shares in its indexes

Index provider MSCI is consulting with the industry on whether to increase the weighting of China A shares in its indexes.

MSCI has already implemented an initial 5% inclusion of China A shares in its China indexes and related composite indexes, including the MSCI Emerging Markets index.

MSCI said Wednesday it was proposing an increase of MSCI China A large-cap securities to 20% from 5% of their respective free float-adjusted market capitalizations. This increase would occur in two equal stages: May 2019, coinciding with MSCI's semiannual index review, and August 2019 for its quarterly index review.

It is also proposing the addition of ChiNext of the Shenzhen Stock Exchange — which represents around one-fifth of the total China A-shares opportunity in terms of stock volume and market capitalization — to the list of eligible stock exchange segments, effective from the May 2019 semiannual index review. The final proposal is to add China A midcap securities to indexes, with a 20% inclusion factor, as part of MSCI's May 2020 semiannual index review.

A consultation document said China A shares currently represent 0.71% of the MSCI Emerging Market index. With a 20% large-cap inclusion, the pro forma index weight of China A shares would increase to 2.8% in August 2019. Adding China A midcap securities at a 20% weighting in May 2020 would see the pro forma weighting of A shares grow to 3.4%.

The document also outlined two rationale for the consultation. The first is "Stock Connect robustness" — the collaboration between the Hong Kong, Shanghai and Shenzhen stock exchanges that allows international and mainland China investors to trade securities in each other's markets via trading and clearing facilities of their home exchange.

"Stock Connect has proven to be a robust channel to access China A shares. Currently, Stock Connect daily quota and (Chinese yuan) liquidity are sufficient to address an inclusion factor that is multiple of the current size," said the document.

The second is market accessibility improvements. The quadrupling of the Stock Connect daily limit, visible reduction in trading suspensions and implementation of a closing auction mechanism on the Shanghai Stock Exchange were highlighted under this rationale.

MSCI said in the document that the implementation of the initial 5% of shares into indexes triggered "overwhelming positive feedback from market participants."

The consultation runs to Feb. 15, with plans to announce a decision on or before Feb. 28.