A-shares, listed on continental Chinese markets, will gain a larger presence in MSCI’s broad benchmark indices. In addition to capital inflows, this should lead to greater openness of Chinese markets.
- The inclusion factor of Chinese shares will be raised beginning in May
- This will likely mean greater participation by institutional investors...
- as well as short- and long-term support for the Chinese market
The 2016 creation of Hong Kong-Shenzhen Stock Connect and the inclusion in May 2018 of 230 stocks in international equity indices have eased market access by non-resident investors. However, Chinese residents still account for the vast majority of trading in A-shares, which are denominated in renminbi (RMB) and are listed on the Shanghai and Shenzhen markets, which have a total market cap of USD 7,000 billion.
From May, MSCI will raise the inclusion factor of Chinese A-shares in its global equity indices in three stages, from 5% currently to 20%. As a result, the weighting of A-shares should rise from 0.7% currently to 3.3% in November 2019, with 421 large and mid-cap equities, a small number of which are listed on ChiNext, the “Shenzhen NASDAQ”.
This will result in an estimated inflow into A-shares of about USD 56 billion. According to statistics from Northbound Stock Connect (the platform through which non-residents invest in A-shares), transactions totalled RMB 121 billion in the first two months of 2019 after RMB 294 billion for all of 2018.
This seems to be reflected in the year-to-date performance of the Shanghai A and Shanghai Shenzhen CSI 300 indices. However, the spike in the indices (+28% in the year to 6 March 2019 by the CSI 300) could soon trigger tighter controls by the Chinese authorities to limit inflows, as the bursting of a bubble in summer 2015 dealt a hard blow to retail shareholders, who are very active in trading A-shares.
A first step towards full inclusion?
MSCI made this decision after a broad consultation of its major clients. It can be seen as the crowning touch on the liberalisation of the Chinese market in recent years. That being said, total inclusion still appears to be a long way off. It took Taiwan nine years and South Korea about six years to reach total inclusion after their initial inclusion in international indices.
Nevertheless, the impact is likely to be positive in both the short term, via inflows, and the long term, by increasing the proportion of A-shares held by institutional investors to as much as 10% of the free float. Broader market participation by institutional players should ensure greater stability than when shares are held directly by retail investors. It should also boost transparency and governance standards.
Part of internationalising the Chinese economyOver the past several years, Chinese authorities have served notice of their determination to broaden the international scope of their economy and financial markets. There is general agreement that integrating the RMB in the IMF’s basket of special drawing rights (SDRs) in October 2016 was an important step in raising the renminbi to the status of a major currency. Inclusion recognises “the progress made in reforming China’s monetary, foreign exchange, and financial systems, and acknowledges the advances made in liberalizing and improving the infrastructure of its financial markets”, said Christine Lagarde, Managing Director of the IMF. The opening-up of Chinese equity markets, with greater access to Chinese shares, will most likely be the next step.
 Stock Connect is a securities trading and clearing programme developed by Hong Kong Exchanges and Clearing, the Shanghai Stock Exchange and China Securities Depository and Clearing Corporation. It aims to allow reciprocal access to stocks of the PRC (mainland China) and Hong Kong.
 The inclusion factor is the share of a market’s market cap included in the MSCI indices.
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