China is already the largest single weight in MSCIâs Emerging Markets Index. Adding A-shares will underline its position as the worldâs second-largest economy.
How much difference would it make to MSCI’s Emerging Markets Index to include Chinese mainland-listed stocks, known as A-shares? Quite a lot. According to a roadmap for inclusion, published by the index compiler in May, A-shares would account for more than a fifth of the overall index if they were all included. This would increase China’s weight to 43.6% – more than three times the size of the second-biggest constituent, South Korea.
MSCI does not propose to add all the A-shares at once. The first step would be to include just 5% of the A-share universe, which would equal 1.3% of the overall EM index. Alongside this potential inclusion, MSCI plans to add overseas-listed Chinese companies, which will initially account for about 3.5% of the overall index (2.8% when all A-shares are added). The overseas listings are due to be included between November and May 2016; the A-shares additions are still provisional.
The next step would be to increase the percentage of A-shares in the index. MSCI says it needs to see further improvements in the quota allocation mechanism and in the size of overall quotas under the various access schemes, such as RQFII, before it does that. The index provider also calls for further relaxation on capital mobility, for instance a loosening of the limits on the Shanghai-Hong Kong Stock Connect.
Should the Chinese regulators meet MSCI’s requirements, the proportion of A-shares in the EM index can be expected to rise, ultimately ending in the situation previously mentioned when A-shares take up a fifth (20.5%, to be exact) of the overall index.
To get to full inclusion would take further reforms, however, namely the abolishment of the quota system, further liberalisation of capital mobility restrictions and a broad alignment with international accessibility standards.
©2015 funds global asia