Defining Moment for China A-Shares as They Are Incorporated Into MSCI Emerging Markets Index
Yicai Global
/SOURCE : Yicai
Defining Moment for China A-Shares as They Are Incorporated Into MSCI Emerging Markets Index

(Yicai Global) June 21 -- MSCI Inc. (NYSE: MSCI), a leading provider of global equity indexes, has decided to include China's A-shares in MSCI Emerging Markets Index, beginning from 2018. MSCI has announced results of its long-awaited MSCI 2017 Market Classification Review. Inclusion of China A-shares in the Index is a turning point for China's financial markets with long-term ramifications, including nearly USD10 billion foreign investor's money expected to pour in to the world's second largest stock market. "The decision has broad support from institutional investors" MSCI consulted with, said the MSCI statement about the review results.

MSCI plans to add a total of 222 China A Large Cap stocks, representing on a pro forma basis approximately 0.73% of the weight of the MSCI Emerging Markets Index at a 5% partial 'Inclusion Factor.' It will use a two-step inclusion process to account for the existing daily trading limits on Stock Connect. "The first inclusion step would coincide with the May 2018 Semi-Annual Index Review followed by the second step which would take place as part of the August 2018 Quarterly Index review." 

"Despite the reduced A-shares index weighting of 0.73%, today's announcement represents a defining moment for the Chinese stock market. China's inclusion to MSCI's Emerging Market Index symbolizes the continuation of China's inevitable rise and increased relevance within global portfolios," said Xianyongquan Bank of New York Mellon Asset Management's head of Greater China, adding, "While the short and longer term impact will have to be monitored, investors will be cognizant that China's weighting and influence continues to increase. We welcome the recognition from MSCI and the steps taken to find common ground between the two parties,"

Reasons for Milestone Decision

Morgan Stanley cited China's both Stock Connect programs, the Shanghai-Hong Kong Stock Exchange Program and the Shenzhen-Hong Kong Stock Exchange Program, through which China's A-shares can be accessible for international investors and foreign capital, and loosening of pre-approval requirements for financial products as reasons for its historic decision. 

The decision came "primarily as a result of the positive impact on the accessibility of the China A market of both the Stock Connect program and the loosening by the local Chinese stock exchanges of pre-approval requirements that can restrict the creation of index-linked investment vehicles globally," said MSCI. The investors also welcomed the decrease in the number of suspended China A shares, it said.

Investors' Rush

Ahead of the decision, the investors poured billions in on some China A-share stocks, Reuters news agency reported, saying "Foreign investors bet billions on China blue-chip joining MSCI Index," expecting MSCI's decision would be positive. 

Reaction

"China gains access to MSCI's USD1.6 tn global index," Financial Times headlined, saying, "Decision marks a milestone in Beijing's efforts to attract foreign funds."  Bloomberg said, "China Secures MSCI Inclusion as USD6.9 trillion market goes global," commenting, "It also advances President Xi Jinping's ambitions to make the yuan a global currency."

"Today's announcement from MSCI could trigger a massive change in global finance." It "is the first step of a massive shift into Chinese stocks… It's the first roll of the small snowball down the hill," commented Dr. Steve Sjuggerud, editor of True Wealth. "If you're a [American] teacher, a firefighter, or anyone else with a decent pension fund, you will unknowingly start owning local Chinese stocks for the first time… very soon," he said, advising, "Own Chinese stocks."

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Keywords: MSCI , Emerging Markets , INDEX , China A-Shares , Announcement , Review Results , Stocks , Blue-Chip , Investor , Inclusion , Decision , Stock Market , Connect