Stock Connect Improvements May Lead to Increase in A-Share Inclusion, MSCI Research Head Says

Stock Connect Improvements May Lead to Increase in A-Share Inclusion, MSCI Research Head Says

Ge Wei’er

Date: Wed, 06/21/2017 - 15:22 / source:Yicai

(Yicai Global) June 21 -- MSCI Inc. [NYSE:MSCI] published the MSCI 2017 Market Classification Review and announced that Chinese A-shares will be included in the MSCI Emerging Market Index early this morning. MSCI plans to add 222 China A Large Cap stocks.

Based on the 5 percent inclusion factor, these shares account for 0.73 percent of the MSCI Emerging Market Index. Further integration of A-shares will likely be based on A-share market access and international standards. MSCI would want to see improvements in interconnection mechanisms, the easing of daily quotas on the Shanghai and Shenzhen stock markets, fewer trading suspensions and further relaxation of restrictions on the creation of index-linked investment products.

Yicai Global interviewed the Global Head of Index Management Research within MSCI’s Index Research Group -- Sebastien Lieblich. He said that the proposal to include A-shares in the MSCI Emerging Market Index was supported by many parties and that he looks forward to seeing regulators take additional steps to remove restrictions on Hong Kong-Shanghai and Shenzhen-Hong Kong transactions.

Yicai Global: So, first of all, tell us what is the difference? Why [are] you adding A-share[s] into your market classification this time?

Lieblich: So clearly, there has been a game changer, which is the proper functioning of the Stock Connect, which has been viewed by international investors as a good access channel to the China A-Shares market. In addition to that, there’s also the lowering of the number of halted securities in the China A market, which also has been welcomed by international investors, and then finally, the loosening of the preapproval requirements on the licensing of index-linked investment vehicles has also been a very important factor.

Yicai Global: And in the meantime, I believe you’ve been talking to a lot of your clients as well as the regulators in China, so what are their feedbacks?

Lieblich: So, we have received great support on our proposal, on this fourth proposal, to add China A-shares into the MSCI Emerging Market Index and really the two elements which were put forward very strongly is Stock Connect and is the loosening of the preapproval requirements.

Yicai Global: And in the future, what is your expectation for the full inclusion of A-Share?

Lieblich: So, the full inclusion of A-Shares will be a big thing, right? For the next inclusion, which might be increasing the inclusion factor, which is currently at 5 percent, to a higher number and adding A-Shares mid-cap stocks to the index, we would be expecting to see a well-functioning Stock Connect. We would want to see the trading limits on Stock Connect being removed. We would be expecting to see the number of halted securities to come down further and also to see a further loosing of the preapproval requirements on data.

Yicai Global: So, this time like only 222 stocks were included, am I right?

Lieblich: Yes, that’s absolutely correct. These 222 stocks are large-cap stocks in the A-share market.

Yicai Global: What makes you make this decision?

Lieblich: It was based on feedback we had received previously from investors that given that we were limiting the size, in terms of the size in emerging market, having less securities but nevertheless a good representation was important to them and less securities with a good representation -- large caps are a very good choice for that.​

Yicai Global: What do you think this can give more representative to the Emerging Market Index of MSCI?

Lieblich: Yes, absolutely. The weight is still very small, right? Or relatively small -- 0.73 percent -- but that’s just a starting point, right? I mean, China A-shares are increasingly part of the investment opportunity set of international institutional investors, so they have to be included in an index such as the MSCI Emerging Market Index.

Yicai Global: Last question. What do you want to see more from the A-share in terms of loosening the market regulation?

Lieblich: So, basically, we would like to see additional measures or regulation on the trading halts -- really trying to circumvent that level of high trading halts, and we would want to see also potentially the trading limits, which are imposed on Stock Connect, being removed.

Yicai global: Oh, one more question. How -- what is the, in terms of the capital, what is your -- what is the initial capital in force after the addition?

Lieblich: So, we don’t really measure it because we have information on how much AUM is tracking, right? But it’s going to be nonmarginal. That’s for sure.

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Keywords: MSCI, A-Shares