Is MSCI Set To Up Its China A Shares Exposure?

MSCI, one of the world’s leading providers of indices for investment markets, looks set to incorporate a greater weight for China’s mainland “A Shares” in the coming weeks.

Traditionally, MSCI, Standard & Poor’s, FTSE, and other index providers will include shares of companies in their leading indices in a prescriptive fashion, depending on the structure of the index.

However, when it comes to Chinese mainland shares, MSCI has chosen to hold steady on a ‘full’ inclusion in their indices. The index provider has opted to gradually raise their A Shares exposure over coming years, with full inclusion extending beyond 2020.

In 2018, MSCI released a consultation to understand the market and reaction to potentially increase the exposure to A Shares from 5% to 20%.

“This new consultation, explored in more detail in our new paper… was primarily motivated by strong validation for the Stock Connect trading channel, which allows international and Mainland Chinese investors to trade securities in each other’s markets, and continued improvements on overall market accessibility,” said Chin Pin Chia, MSCI’s Head of Asia Pacific Research.

Currently, A Shares are slated to increase their weighting factor to 20% next month.

Rival index provider S&P has indices focused on A-Shares, such as the S&P Access China A Index.

Fund Flows To Follow

As reported by CNBC, US investment bank Citi believes as much as $US200 billion in inflows will hit Chinese bond and equity markets in 2019, up from $US120 billion in 2018.

“Inflows from bonds and equities are likely to continue supporting China’s [balance of payments],” Citi said in a January 31st report.

The implications for Australian ETF investors with emerging markets (EM) exposure is significant, given that many index-focused investors have had a lesser exposure to China than they may have otherwise known. Vanguard FTSE Emerging Markets ETF (VGE) and SPDR S&P Emerging Markets ETF (WEMG) are EM-focused ETFs with China exposure 34% and 31.6%, respectively.

Over the past 30 years, China has grown to become one of the most powerful economies in the world, ranked number-two only to the United States. With changes underway, investors will be looking towards China to tap into the plethora of growth opportunities.

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