China’s A shares seen joining MSCI index, but uncertainties lurk

Inclusion of China’s A shares in the closely followed MSCI index is almost a certainty by next year and could spark a flood of foreign capital into the country’s tightly controlled capital markets.

The timing though is tricky after MSCI chose last year not to include mainland stocks in the face of resistance from large institutional fund managers such as Fidelity and Templeton.

“We see this as a 50-50 chance event but the conditional probability (if no for this June) for inclusion next year is close to 100 per cent,” analysts at Goldman Sachs said in a research note, noting that the chances of getting into the international benchmarks will be higher next year given the pace of market liberalisation.

Goldman said MSCI’s decision to include China’s A shares could be significant and see long-lasting capital inflow in the country’s stock markets, with an estimated US$17 billion of net buying per year based on an additional market cap of US$110 billion.

That assumption has factored in a combination of passive and active fund flows including traditional mutual funds and exchange-traded funds.

The research report suggested though that the top-down estimated is vulnerable to a high margin of error, given the swing factors like size and classification of global liquidity pools, the pace of liberalisation of China’s capital markets, as well as allocation going into A shares.