MSCI adds China-listed stocks to index in long awaited move

Proposed breakdown of MSCI EM index

MSCI adds China-listed stocks to index in long awaited move

In the last couple of years, the inclusion of China A shares has been delayed, due in part to investors' concerns about the liquidity and replication risk that may result from potential renewed voluntary suspensions in trading of mainland Chinese companies on the local stock exchanges.

The MSCI announced Tuesday in the United States (Wednesday in Beijing) that from June 2018, it will include some China A-shares in its EM (Emerging Markets) index and ACWI (All Country World Index).

MSCI also said it would consult investors about adding Saudi Arabia to the benchmark and that Nigeria would remain a frontier market, with the possibility of being downgraded to "standalone" status.

While the big news centered around the index provider's decision to finally promote China A-shares to the MSCI Emerging Markets Index, MSCI revealed some other noteworthy tidbits.

Commenting in a statement after news of the inclusion, the China Securities Regulatory Commission said it plans to facilitate foreign money managers' A-share investments, adding the decision shows Global confidence in China's economic prospects.

The percentage roughly translates to $17bn (£13.4bn, €15.3bn) of inflows into A-shares, based on the amount of money now tracking the MSCI EM index, according to the index provider. The blue-chip CSI300 Index .CSI300 shook off early profit taking to finish up 1.2 percent at its highest close in 1-1/2 years. A total of 222 large-cap Chinese stocks will be added.

Previously, foreign investment in mainland shares - known as A shares - has been dominated by stock-pickers operating on a piecemeal basis. Together the stocks equal a 0.73% weighting.

"In our experience, many Chinese A-share managements have yet to fully grasp the duties imposed by a listing, not to mention inclusion in a global index", said Gary Greenberg, head of emerging markets at Hermes Investment Management, in a note.

MSCI's decision has been closely watched as a sign of China's growing importance on global financial markets.

Other fund managers also welcomed the decision, along with Chinese regulators. "It's very hard for us to articulate any type of timeline with respect to further inclusion", Lieblich told reporters.

That's the underlying question investors should ask themselves following MSCI Inc.'s decision to add mainland shares to its benchmark indexes.

"The inclusion of "A" shares in the MSCI index is in line with the inevitable needs of global investors and reflects the confidence of worldwide investors in the good prospects for China's economic development and stability of the financial market", the CSRC said in a statement. "This is based on full-weight, full inclusion for both MSCI and FTSE".

MSCI may revise the implementation road map to a single phase if the daily limit on Stock Connect trading were to be abolished or significantly expanded before the scheduled inclusion dates.

In total, including H-shares in Hong Kong and Chinese companies listed in the U.S. and other regions, China would then have a almost 40% weighting in the index.

China will subsequently only represent 0.73% of the $1.5trn index, 0.8% of MSCI Asia Ex-Japan, 2.6% of MSCI China and less than 0.1% of the MSCI All Country World Index.

Commenting on the impact of the decision, Moody's writes: "MSCI Emerging Markets indices will have representation from the world's second-largest domestic equity market by market capitalization".

China is a markedly unpopular market when it comes to attracting foreign investment - for much the same reasons that it hasn't been included in the MSCI indices until now.

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