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MSCI Index to Add China A-Shares: U.S. Investors Can Get ‘Onshore’ China Exposure

In a widely expected move, MSCI Inc., the provider of global equity indexes, said June 20 that it will include China A-Shares in its MSCI Emerging Markets Index and MSCI All Country World Index (ACWI) beginning in the second quarter of 2018.

Since many institutional fund managers, exchange-traded funds and pension-fund assets track their performance based on benchmark indexes like those compiled by MSCI (upwards of $1.6 trillion track the Emerging Markets Index), the inclusion of China A-shares is expected to result in upwards of $17 billion to flow into China’s domestic stock markets.

MSCI plans to add 222 China A-shares traded on the Shanghai and Shenzhen exchanges in a two-step process next May and August. Its indexes already had included Chinese stocks listed offshore, primarily on Hong Kong’s stock exchange. The initial inclusion weighting will represent about 0.73% of the MSCI Emerging Markets Index but should grow over time.1

MSCI had rejected the proposed inclusion of China A-shares on three previous occasions. But this year’s review had the support of a handful of large global institutional investors. That was partly due to the introduction of the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect platform that provides foreign investors with greater accessibility to the A-share market through Hong Kong’s stock exchange.

Prior to Stock Connect, foreign investors were subject to pre-approval requirements and tight capital controls by the Chinese government. MSCI’s decision was also influenced by discussions with Chinese officials over loosening local stock-exchange requirements that restrict the creation of index-linked investment vehicles globally.

There were also concerns over local exchanges’ trading suspension policies, but Chinese regulators have reduced the amount of time that companies can suspend trading in their shares while improving disclosure requirements. This has resulted in fewer trading halts since local markets crashed in 2015 – though MSCI noted that trading suspensions in the A-shares market remain by far the highest in the world.2

Exchange-traded funds that track MSCI’s index, China’s benchmark Shanghai Shenzhen CSI 300 Index and Asian emerging markets have performed well in 2017. Year-to-date, the iShares China Large-Cap exchange-traded fund (FXI) is up about 14.5% through June 22, compared to 8.5% for the CSI 300. The Deutsche X-trackers Harvest CSI 300 Index ETF (ASHR) has increased by 12.7% for the same period.

The MSCI Emerging Markets Index is up by more than 16.5% so far this year, while the iShares MSCI Emerging Markets ETF (EEM) has gained nearly 18.0%, and the Vanguard FTSE Emerging Markets ETF (VWO) has risen by 13.4%. The iShares MSCI Emerging Markets Asia ETF (EEMA), meanwhile, has gained more than 24.0% this year.3

 

 

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Citations.

1-“RESULTS OF MSCI 2017 MARKET CLASSIFICATION REVIEW,” MSCI Inc. press release June 20, 2017: https://www.msci.com/eqb/pressreleases/archive/2017_Market_Classification_Announcement_Press_Release_FINAL.pdf (accessed June 20, 2017).

2-“CONSULTATION ON CHINA A-SHARES POTENTIAL INCLUSION – May 2017,” MSCI Inc.: https://www.msci.com/documents/1296102/ffd4f403-40c8-4821-a521-d74d7e4e1127 (accessed June 23, 2017).

3-Market data compiled from MSCI Inc. and Bloomberg L.P.

Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory Service offered through BCJ Capital Management. World Equity Group, Inc. and BCJ Capital Management are independently owned and operated. BCJ Capital Management is a (SEC) registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. BCJ FG 17-505

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