Edging Closer: MSCI's Inclusion of China A-Shares

We believe China A-shares inclusion is now much closer, and could realistically begin this year. Both China and MSCI have been very constructive, showing efforts on both sides to make this a reality.

Jun 5, 2017 | Invesco Asian Investment team

June 2017 marks MSCI’s fourth annual review for the inclusion of China A-shares in their MSCI EM index1 – an index that tracks USD 1.6 trillion2 worth of assets around the world. This ongoing review is in recognition of China’s gradual market liberalization efforts to open up its domestic capital markets. In its 2016 annual review held last June, MSCI did not include China A-shares in the MSCI EM index and other indices. As a result of this review, China A-shares had zero weighting in the index. Last year, we expressed our view that it is only a matter of time before they would be included3.

In our view, over the past year, China has made good progress in opening up its equity market access such as by introducing the Shenzhen-Hong Kong Stock Connect program. MSCI, in a practical and timely manner, also changed the inclusion framework from the obsolete ‘Qualified Foreign Institutional Investor’ (QFII) scheme to a more representative ‘Connect’ program.

In our latest paper, we elaborate on the developments over the past year that we believe making inclusion more likely. We also discuss the roadmap for the inclusion, and why the A-shares stock addition would provide a better representation of the Chinese economy and diversified exposure to the current MSCI offshore Chinese equity universe.

One year on – what has changed?
Historically, market accessibility and investability of A-shares have been issues holding back MSCI’s inclusion of A-shares in the MSCI EM index. MSCI cited three remaining requirements that need to be fulfilled:

  • The effective implementation of QFII policy changes and removal of the 20% monthly repatriation limit;
  • The effective implementation of a new resolution to trading suspensions; and
  • The pre-approval from local exchanges when launching financial products.

As a collaborative effort, over the past year, both the Chinese government and MSCI have dedicated effort to remove the remaining hurdles. MSCI's assessment framework In our view, the most significant change from MSCI is the consideration of the “Stock Connect” programs, rather than the QFII/RMB Qualified Foreign Institutional Investor (RQFII) programs, as indicators of increased Foreign accessibility to Chinese markets. MSCI had been using the QFII/RQFII program as a gauge since its initial review in June 2013.

We welcome MSCI’s change to the assessment framework. We believe the reason for this change is twofold: the significant improvement of market accessibility and capital mobility with the launch of the Shenzhen-Hong Kong Stock Connect, and the obsolescence of the QFII/ RQFII programs. We believe this positive development effectively removes MSCI’s first hurdle for inclusion.

To continue reading, click Download PDF

1Because the MSCI EM index is part of the MSCI All Country World index (ACWI), once A-shares are included in the EM index, they will also simultaneously be included in other regional and global MSCI indices, such as the MSCI Asia ex-Japan index.
2Source: MSCI, eVestment, Morningstar and Bloomberg as of December 31, 2016 (latest available data), released by MSCI on April 21, 2017.
3 “Countdown to MSCI China A-share Inclusion”, Invesco, May 2016.