MSCI Inc.'s inclusion of an initial sliver of China's Shanghai- and Shenzhen-listed A shares to its benchmark indexes midyear came off without mishap, clearing the way in quick succession for a more substantial follow-up over the coming year.
MSCI's first toe in the water — adding 5% of the market between June and September to its widely tracked global emerging markets index — was "extremely smooth," with consistently good feedback from investors, said Chia Chin Ping, MSCI's Hong Kong-based head of research for the Asia-Pacific region.
In an expeditious move to build on that success, MSCI will consult with money managers and investors through mid-February 2019 on a proposal to quadruple, to 20%, the share of large-cap stocks listed in Shanghai and Shenzhen to be included in the index. That second step would raise the large-cap weight to almost 3% of the index from just more than 70 basis points at present.
Another 7.5% of the A-shares market could be added to the index in both May and August of 2019. The New York-based company said it will announce a final decision on how to proceed by Feb. 28.
Mr. Chia said the flawless execution of the initial A-shares inclusion has given MSCI confidence to fast-track the process. The "very good feedback" MSCI got following the first round of inclusion will "enable us to move a lot faster," both in terms of timing and the scale of the follow-on step, said Mr. Chia.
That first move — at a less than 1% index weighting — was sized to give asset owners not yet comfortable investing in mainland-listed shares room to remain on the sidelines without incurring undue tracking error risk.
While that negligible weighting could have left a lot of investors sitting out the first round, "the numbers that we see seem to suggest otherwise," said Mr. Chia.
Data provided by MSCI and the Hong Kong Stock Exchange showed the value of A shares held as of Sept. 30 by offshore investors — using the Stock Connect program China launched in 2014 to give Hong Kong-based managers and asset owners access to mainland-listed shares — surging to 665 billion renminbi ($96 billion) from 347 billion renminbi just ahead of MSCI's June 2017 announcement that it would add A shares to its indexes in 2018.
Those figures suggest strong interest and strong inflows, especially when this year's 20% retreat in the A-shares market is taken into account, said Mr. Chia. More than half of those flows have come from active investors, he added.
Battered in part by an incipient trade war between the U.S. and China, at the close of Asian trading Nov. 8, the Shanghai Stock Exchange composite was down 20.31% for the year while the Shenzhen Stock Exchange composite was off 29.77%.