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SCMP Reporter

With an initial batch of 271 companies, the new benchmark caters specifically to domestic investors

Morgan Stanley Capital International yesterday launched an investible index that tracks the performance of the mainland's A shares, catering specifically to domestic investors.

Like the MSCI international equity index series, the new MSCI China A Index is free-float adjusted and is compiled using a bottom-up industry group methodology to capture the economic diversity of the market.

By comparison, the FTSE/Xinhua China A50 Index, launched in January  last year, and the Shanghai and Shenzhen 300 Index, which went live last month, both include stocks primarily according to their market capitalisation.

To be eligible for inclusion in the new  index, stocks need to have a free-float adjusted market capitalisation of at least one billion yuan and a minimum free float of 15 per cent.

No more than 50 per cent of the tradable shares can be in the hands of a single shareholder.

It was completely independent from the company's other indices, Kenneth O'Keeffe, executive director in the product management group, said  yesterday.

'The MSCI is very careful in making sure that our indices are investible,' Mr O'Keeffe said with regard to the screening of size and liquidity. 'What we mean by that is we don't want the index to be a theoretical representation of the market but to make sure it is composed of securities that asset managers can readily buy and sell in the market place and that it can be replicated.'

The index will automatically include the 25 largest stocks, based on their free-float adjusted market cap. It is targeting 65 per cent representation within each of the 24 industry groups. Annual rebalancing and quarterly reviews will  ensure that the index is updated to reflect changes in the market, including new listings, secondary share offerings and the upcoming sales of non-tradable state shares.

Like the group's other indices, the MSCI China A Index  does not track a fixed number of companies, although the  figure is likely to hover at around 300 stocks, which roughly represent the investible universe in the A-share market.

'If you had an index that tracked only the 50 largest securities in the China A-share market, it would not be a good representation of the overall market as it would cover less than 30 per cent of the tradable market cap,' Mr O'Keeffe said.

However, more than 80 per cent of the securities have a market cap below one billion yuan, which, according to fund managers, is a cut-off point for ensuring that the securities are large and liquid.

Including 600 stocks in the index, or even the entire market of 1,377 securities, would not be very representative either, Mr O'Keeffe said, noting that as of February,  more than half of the stocks in a theoretical China 600 index would have a tradable market cap of less than one billion yuan.

At launch, the MSCI China A Index will include 271 companies, the biggest being China United Telecommunications with a 3 per cent weighting, followed by China Yangtze Power at 2.9 per cent and China Merchants Bank with 2.7 per cent.

The new MSCI index is down 6 per cent so far this year, compared with declines of 10 per cent for the Shanghai A-Share Index and 14 per cent for the Shenzhen A-Share Index.



MSCI launches index to track A shares