MSCI on path to include A shares but on small scale, say analysts

PUBLISHED : Tuesday, 23 May, 2017, 9:57pm
UPDATED : Tuesday, 23 May, 2017, 10:53pm

Investors remain optimistic that MSCI will add A shares to its Emerging Markets Index this year despite failed attempts in the previous three consecutive years.

Jing Ulrich, managing director at JP Morgan, said the probability of success of the fourth attempt was above 50 per cent.

MSCI, which is used by 97 out of 100 of the world’s largest money managers, has worked with central government authorities for years to include Chinese A shares in its index. If the New York-based index provider decides to include A shares, it could draw up to US$400 billion into Chinese stocks over the next decade.

“When it comes to MSCI inclusion, they always look at accessibility, transparency and, mostly, liquidity,” Ulrich said. “In the last several years, many Chinese companies were suspended from trading.” That made it “impossible” for MSCI to add A shares to the index, she said.

Ulrich added that the inaccessibility of the market to international investors also prevented A shares from being included in past years.

“But the chance this year for inclusion is higher compared to previous years because China has taken a lot of steps to address major areas of concern,” she said.

The weighting suggests that the inclusion initially will not have much of an impact
Ben Kwong Man-bun, executive director of KGI Asia

Ben Kwong Man-bun, executive director of KGI Asia, also believes A shares are on path to be included in MSCI this year as a result of China’s ongoing effort to open up its market and internationalise its currency.

“But the scale will be quite small,” he said, “The weighting suggests that the inclusion initially will not have much of an impact.”

MSCI announced in March a proposal which would allow 169 eligible A share stocks to be included in the index. These companies would make up an initial weighting of around 0.5 per cent in the MSCI Emerging Markets Index in 2018.

The new proposal marks a major reduction from the 448 qualifying stocks under last year’s plan.

Ulrich said the inclusion would trigger more capital inflows into Asia but the amount would be limited given the small weighting. But she added that foreign investors need to build up their positions before the inclusion because “this weighting will go up substantially in the coming several years”.

Ulrich also pointed out that given the particularly strong performance of China’s economy in the first quarter of this year, the country’s macro performance will moderate in the second half.

“In the first quarter, we have a very strong, broad-based recovery in the economy,” she said, “So we expect that 2017 GDP growth to be higher than what the government expected at 6.5 per cent.”