MSCI, the market index provider, has completed a partial inclusion of Chinese mainland listed equities into its global and emerging market benchmarks, but says further conditions must be met before it will include any more.
The MSCI AC World and Emerging Markets indices now include 472 China A shares. The shares are traded on either the Shanghai or Shenzhen stock exchanges, and 244 are large-caps and 228 are mid-caps.
Because MSCI’s flagship global and emerging market indices now include some A shares, passive funds that track them and the benchmarks against which active managers measure performance have a greater level of direct exposure to the world’s second biggest economy.
But the weightings to China are still relatively small: China A shares only account for 0.5 per cent of MSCI AC World Index and 4 per cent of MSCI Emerging Markets Index.
MSCI normally consults on possible changes to its indices before enacting them, and said it would only launch a consultation on further inclusion of China A shares after a number of concerns have been addressed by the Chinese authorities. For example, China will need to provide access to hedging and derivatives instruments. “Investors require liquid on- and offshore index futures and options contracts in order to expand their allocation to China and manage their increased exposure,” explained MSCI.
Other issues highlighted by international institutional investors include the fact that trading holidays on China’s onshore markets and trading holidays on Stock Connect are not aligned. Stock Connect is a trading scheme between the Hong Kong, Shanghai and Shenzen stock exchanges.
“Given that most global institutional investors currently rely on Stock Connect as the primary access channel for China A shares, it is important that the current trading holiday arrangement is reviewed to minimise unnecessary investment frictions,” added MSCI.
