MSCI will include China A shares in its EM index

MSCI will include China A shares in its EM indexā€¯

Chinese stocks are to be included in a leading emerging markets benchmark for the first time, an important step in opening up the country's huge equities market to worldwide investors.

MSCI said the move has "broad support" from global institutional investors and was the result of loosening of restrictions enacted by China on foreign ownership of "A" shares - stock in mainland China-based companies - ownership of which had once been limited to mainland citizens. The index provider also left the door open to include more A-shares in its indexes, subject to a greater alignment of the China A shares market with the standards of accessibility in other worldwide markets and the resilience of the exchange links connecting Shanghai and Shenzhen with Hong Kong.

"The partial inclusion will start with an approximately 0.73% weighting of China's A-shares in the MSCI Emerging Markets Index (Exhibit 2), which translates into approximately $11 billion of near-term fund inflows into China's onshore markets from funds benchmarked to that index".

The China Securities Regulatory Commission, the country's securities watchdog, said in a statement that inclusion was "both an opportunity and a challenge for reform" and that China would continue to try to internationalize its market while promoting stability at home.

Global equity index provider MSCI will add China A shares to two of its indices starting June 2018.

Also seen as boosting China's chances is MSCI's decision to slash the number of A shares for inclusion to 169 from the previous proposal's 448.

Kim Jung-hyun, an analyst at IBK Securities, expected the Korean stock market to see a possible outflow of more than 24 trillion won in the long term if China's inclusion into the index is completed.

Meanwhile, the FSC said that it would not push too hard for inclusion in the advanced market index.

"The MSCI inclusion responds to the needs of global investors and shows investors' confidence on Chinese economy and financial market".

Passive investors in emerging markets through MSCI will be more exposed to China as a result of Wednesday's announcement.

It's an important step for China's communist leaders, who have been pushing to more closely integrate their country's markets and currency with the global financial system.

For Nigeria, MSCI said it would postpone until November a ruling on whether the country should be cut from its frontier markets index to allow investors to assess a new trading window introduced by the country's central bank.

MSCI was likely to open its emerging market benchmark to Chinese mainland-listed shares at its review Tuesday, but investors were also expecting news on other markets such as Argentina and Saudi Arabia. "This marks the beginning of A shares, the biggest EM equity market by market cap and trading volume, joining the pool of investable assets to global investors", said Wendy Liu, Nomura's head of China equity research and chief strategist for Greater China.

MSCI plans to add 222 China A Large Cap stocks, which will account for around 0.73 per cent of the MSCI Emerging Markets index.

"Over the next 14 months, portfolios will need to be rebalanced to match the new weighting, and some institutions have already begun to re-allocate in anticipation of the change".

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