MSCI includes China A-shares in its global benchmark
After three attempts, Chinese shares gain acceptance on the fourth try
China’s domestic equities will join MSCI’s benchmark indexes, a landmark step in the nation’s integration with the global financial system.
The decision, announced by the New York-based index compiler on Tuesday, will give China’s US$6.9 trillion stock market a bigger role in everything from exchange-traded funds to 401(k) retirement plans. It also advances President Xi Jinping’s ambitions to make the yuan a global currency.
While locally-traded Chinese shares will initially comprise just 0.7 per cent of MSCI’s global emerging-markets gauge, the weighting could increase over time if the country enacts further reforms. The inclusion will be done in two steps: the first in May 2018 and the second next August. Also on Tuesday, MSCI put off decisions on whether to reclassify Argentina as an emerging market and to demote Nigeria to standalone status. It listed Saudi Arabia on its watch list for potential classification as an emerging market.
“International investors have embraced the positive changes in the accessibility of the China A shares market over the last few years and now all conditions are set for MSCI to proceed with the first step of the inclusion,” Remy Briand, MSCI Managing Director and Chairman of the MSCI Index Policy Committee, said in a statement.
The development punctuates an extraordinary period during which China has sought to enter the mainstream of international finance while still maintaining a semblance of control over its markets. Since MSCI first considered adding Chinese shares to its indexes in 2014, the market has experienced an epic boom and bust, a bout of heavy-handed government intervention and -- more encouragingly for foreign investors -- a steady stream of initiatives to connect local exchanges to the outside world.
The MSCI inclusion “will provide a modest boost to sentiment and flows into China,” said David Loevinger, a former China specialist at the US Treasury who is now an analyst at fund manager TCW Group Inc in Los Angeles. “More importantly it strengthens Chinese reformers that want to open China’s markets. The small index weight looks like a compromise between those asset managers that wanted China in and out.”